Ride-sharing services were a preferred mode of transport before the pandemic, as they are a convenient and cost-effective mode of transport.
According to a MarketsandMarkets report, the global ride-sharing market is expected to grow at a Compounded Annual Growth Rate (CAGR) of 16.6% from 2021 to 2026. This market is expected to be worth $185.1 billion by 2026.
Let us compare two ride-sharing companies, Lyft and Uber, using the TipRanks Stock Comparison tool, and see how Wall Street analysts feel about these stocks.
Last week, Lyft announced its Q2 results. The ride-hailing company’s revenues rose 125% year-over-year to $765 million, soundly beating Street estimates of $696.22 million. What’s more, Lyft significantly narrowed its adjusted net loss from $265.8 million to $18 million in Q2.
Following the significant narrowing of losses in Q2, Wells Fargo analyst Brian Fitzgerald was upbeat about the stock and reiterated a Buy rating with a price target of $80 (52.6% upside) on the stock. The analyst said, “We view the floor on LYFT shares as continuing to rise and expect the share price to appreciate steadily in the recovery as LYFT benefits from reopenings across the US.”
Brian Roberts, CFO of Lyft, commented on the “exceptional” Q2 results, saying, “We grew Active Riders by more than 3.6 million from the prior quarter, generated 125% year-over-year revenue growth and achieved Adjusted EBITDA profitability.”
“At the same time, drivers shared in this outperformance with record hourly earnings. And in July driver earnings remained strong as demand for our platform continued to grow despite increases in reported COVID case counts,” Roberts added. (See Lyft stock chart on TipRanks)
According to analyst Fitzgerald, one key positive was the high numbers of active riders, at 17.1 million, that exceeded expectations. The analyst also anticipates driver acquisition to rise “once pandemic unemployment insurance benefits end, and has seen high driver supply in state where benefits have been rolled back already.”
When it comes to the outlook for Q3, the company expects revenues to increase from 70% to 72% year-over-year to range between $850 million to $860 million. Roberts added at the company’s earnings call, “This outlook embeds an estimated $30 million to $40 million impact from lower prices combined with elevated new drivers sign on bonuses and incentives. And to repeat, if demand growth is stronger, we expect to increase our supply investments.”
Moreover, Lyft projects adjusted EBITDA in Q3 to be between $25 million to $35 million “inclusive of the impact from the supply investments and lower prices.”
Despite the company’s optimism, Fitzgerald listed some key concerns for the stock. These include a significant rise in driver incentives in Q3 from $376.1 million in Q2. Driver incentives offered by Lyft include minimum guaranteed payments, volume-based discounts and performance-based bonus payments that are usually settled within a week.
According to the analyst, another risk to the stock is the potential business impact from the Delta variant of COVID-19 and the “lack of a legislative solution to Massachusetts gig workers.”
Last year, the Massachusetts Attorney General filed a lawsuit against Lyft and Uber (UBER) for misclassifying drivers as independent contractors, which is wrong under Massachusetts law. Lyft and Uber’s motions to dismiss the case were denied by the court in March this year.
Turning to the rest of the Street, consensus is that Lyft is a Moderate Buy, based on 14 Buys and 7 Holds. The average Lyft price target of $75.11 implies an approximately 43.2% upside potential from current levels.
Uber (UBER)
Last week, Uber delivered a solid Q2, posting revenues of $3.93 billion, a jump of 105% year-over-year. The revenue figure surpassed the consensus estimate of $3.74 billion. Moreover, earnings per share came in at $0.58 which compares favorably with a loss of $1.02 in the same period last year. Further, it topped the Street’s estimate of a loss of $0.51 per share.
In Q3, Uber expects total gross bookings to range between $22 billion and $24 billion and adjusted EBITDA to “to be better than the loss of $100 million.” The company expects to achieve total EBITDA profitability in Q4.
Interestingly, Uber is one of Wells Fargo analyst Brian Fitzgerald’s signature picks, and following the Q2 results, the analyst maintained a Buy rating and a price target of $78 (76.2% upside) on the stock.
The analyst pointed out that the higher driver incentives did put the company’s EBITDA under pressure [quarter-on-quarter] but the company “took quick action early on (in Q2) to move the mobility marketplace back to health and shore up the drive supply side.”
According to Fitzgerald, another key positive for the stock is driver additions in the U.S. They were up 30% month-over-month in July, even as Uber drew back on incentives. Furthermore, Uber’s CFO, Nelson Chai, stated on the earnings call that without any major investment from the company, its major markets, including Australia, Canada, France, and the UAE, have seen a recovery in driver supply.
Chai added that Uber’s “mobility EBITDA margin in Q2 exceeded long-range targets ranging from 46% to 67% of revenue.” (See Uber stock chart on TipRanks)
Indeed, analyst Fitzgerald said that based on the rise in driver additions in the month of July, consolidated EBITDA losses are likely to narrow down significantly in Q3. However, while Uber expects consolidated EBITDA profitability in Q4, the analyst still considers it as a “bogey.”
The analyst also pointed out that the synergies between Uber’s Delivery & Mobility businesses are becoming more evident, particularly in the U.S. and the U.K., as around “50% of July bookings came from cross-platform customers, with Uber Pass members driving 25-30% of Delivery Bookings.”
However, Fitzgerald has also cautioned that he does not expect mobility take rates to reach pre-pandemic levels in the second half of the year. Take rate is revenue as a percentage of gross bookings and is an operating metric for the company.
Citing further concerns about risks to the stock, the analyst added, “Incentives to bring drivers back into the markets created externalities, which benefited smaller competitor LYFT.” Moreover, the analyst also believes that Uber has “far less presence” in potential growth suburban markets in the U.S., as compared to its competitor, DoorDash (DASH).
Turning to the rest of the Street, consensus is that Uber is a Strong Buy, based on 20 Buys and 2 Holds. The average Uber price target of $68.76 implies an approximately 55.3% upside potential from current levels.
Bottom Line
It is important here to note that both companies are pursuing different strategies when it comes to increasing the supply of drivers. Uber indicated at its earnings call that 90% of its inactive drivers have said that they expect to come back by September. This is even as Uber is tapering its short-term incentives.
In contrast, Lyft significantly increased its investments in driver incentives by 92% quarter-on-quarter, to $375 million in Q2, and the company plans to increase this investment further if demand recovery continues.
While analysts are cautiously optimistic about Lyft, they are bullish about Uber. Based on the upside potential over the next 12 months, Uber seems to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities
