The business premise seems sound enough, at least on the surface. The problem: Owning a vehicle is more trouble than it’s worth, but taxi cabs are costly and so yesterday. The solution: Just use a mobile app to summon a contracted driver who will ferry you from one place to another at a more efficient (i.e. cheaper) price. Everyone wins.
Except not everyone is winning with this modern-day business model. Shareholders of ride-hailing powerhouses Lyft (NASDAQ:LYFT) and Uber Technologies (NYSE:UBER) just saw another quarter of steep losses.
Both companies fared better than expected, mind you, at least on the earnings front. But both companies’ losses continue to scale up in step with revenue growth rather than decline, as their two biggest expenses are directly tethered to sales. Those expenses are the cost of revenue — what Uber and Lyft are paying their drivers — and marketing expenses.
It’s past time for investors to ask what the plausible path to profitability looks like for these companies.
Woman on cell phone standing in front of a broken-down car. IMAGE SOURCE: GETTY IMAGES.
What’s changing? For the record, the analyst community isn’t fazed by the losses so far, apparently convinced that both ride-hailing brands are on the cusp of fiscal breakthroughs. Current estimates imply Uber will cut its operating losses by more than half this year, and do the same again in 2022. Those same analysts are predicting Lyft will swing to operating profitability next year. Investors are (for the most part) buying into this bullishness.
The graphics below put things in perspective, starting with Uber Technologies. Notice how, thus far, the company’s cost of revenue has consumed 45% to 50% of revenue. Analysts believe these costs will fall toward 40% of sales in the foreseeable future, when marketing spending is expected to slide well below 30% of revenue.
Uber’s profitability is projected to widen soon, but the company’s not explained how its driver costs are going to be curbed. DATA SOURCE: THOMSON REUTERS. CHART BY AUTHOR. DOLLAR FIGURES ARE IN MILLIONS.
The same basic concern applies to Lyft, though at different proportions. Lyft’s cost of sales — or its direct cost of delivering services — lingered in excess of 50% of sales before COVID-19 took hold. Now expectations are that those costs can be whittled down to under 40% of revenue. Marketing expenses are projected to fall to single-digit percentages, while administrative expenses are expected to fall despite expansion into new ventures like bikes, scooters, car rentals, and mass transit (public busing) partnerships.