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It’s Now or Never for Uber and Lyft

Wayne Duggan

This week may be the biggest week in the history of ridesharing stocks. On Tuesday afternoon, Lyft (NYSE:LYFT) will release its first quarterly earnings report in history. On Wednesday, ridesharing drivers in several major cities around the U.S. are planning to go on strike during rush hour. The drivers are protesting their wages and benefits, among other things. Finally, on Friday, Uber is expected to begin trading on the pubic market for the first time in one of the largest IPOs in history.

It's Now or Never for Uber and Lyft

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At the risk of sounding overly dramatic, this week could change the trajectory of ridesharing stocks forever. Here’s what investors should consider.

First Earnings Report For Lyft Stock

So far, the LYFT stock IPO has been a dud. Granted, it has been less than two months since Lyft hit the public market. However, shares are now down 25% from their IPO day.

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Lyft stock bulls are hoping the company’s first earnings report will end the stock’s downward drift. As of this writing, Lyft had not yet reported. Unfortunately, there’s nothing in the company’s IPO filings that suggests Lyft will report anything worth getting excited about.

Assuming Lyft beats consensus analyst expectations on Tuesday, the numbers will likely still not be good. Analysts are expecting an EPS loss of $1.81 and revenue of $739.5 million. Lyft likely won’t be profitable for years. The big hope among investors is that revenue and customer growth won’t slow down as much as Wall Street expects this year.

As I’ve pointed out before, Lyft’s revenue growth dropped from 220% in 2017 to 100% in 2018. D.A. Davidson projects that growth rate will fall to 56% in 2019 and just 30% in 2020. While those growth numbers are still very impressive, they are falling fast. At the same time, Lyft’s losses are growing. Lyft reported a $687 million loss in 2017 and a $911 million loss in 2018.

To make matters worse, Lyft’s window as the only ridesharing stock option closes this week. Investors itching to make a long-term bet on ridesharing stocks will have their first crack at the clear market share leader in ridesharing when Uber hits the market on Friday. It would make sense for some Lyft investors to diversify at least some of their position into Uber, especially if Lyft stock’s earnings disappoint.


Ridesharing Stocks Brace For Strike

The timing of this week’s reported ridesharing driver strike was likely carefully chosen, given how important this week is for both Lyft and Uber. On Wednesday morning during rush hour, Lyft and Uber drivers are reportedly planning to go on strike in major U.S. cities, including New York, Los Angeles and Chicago. The drivers are asking for better wages, better treatment by their employers and better regulation of the industry to protect both drivers and passengers.

Ridesharing drivers are currently classified as independent contractors, meaning they have limited rights and benefits as employees. They are responsible for paying for their own vehicle maintenance, and they are unable to unionize.

Wedbush estimates the average take rate in the ridesharing business today is about 22.3%, up from 20.5% in 2017.

In its own S-1 filing, Uber said driver dissatisfaction is a risk to the company as it fine-tunes its financial metrics over time. Investors should not overlook the potential for a negative public relations disaster on Wednesday and negative potential financial fallout if Lyft and Uber are forced to cave on some of the driver demands to get them back on the road.

Uber IPO

Finally, the biggest news of the week for ridesharing stocks is the highly anticipated Uber IPO. Uber is expected to be valued at around $90 billion this week, making the IPO one of the largest in U.S. history.

In its S-1 filing, Uber revealed its revenue growth has dropped from 106% in 2017 to 42% in 2018. Uber also reported more than a $3 billion operating loss in 2018. Clearly, the company has a long way to go to establish a viable, long-term business model.

The Uber bull case is a familiar one. Uber has the chance to be something special over time.

“A core tenet of our bull thesis on Uber is around the company’s ability to morph its unrivaled ridesharing platform into a broader consumer engine with Uber Eats, Uber Freight, and autonomous initiatives just scratching the surface of the full monetization potential of this platform over the next decade,” Wedbush analyst and Uber bull Ygal Arounian says.

In other words, Uber is a good investment, as long as the company becomes something completely different in the future. That makes Uber the same type of “story stock” as Tesla (NASDAQ:TSLA). However, as Tesla has proven, disrupting the massive established auto industry isn’t as easy as it looks. Over the past five years, the S&P 500 has more than doubled the 23% return by TSLA stock as the company has struggled to turn a profit and demonstrate a viable large-scale business model. Sound familiar?

Takeaway

Ridesharing stocks will be around for a long time no matter how things go down this week. But the uncertainty and red flags in the headlines this week highlight just how risky it is to make a bet on ridesharing stocks at this point.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

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