What can we learn from the Uber and Lyft Initial Public Offerings? Both companies have grown to the point where they have a strong share of the market globally in just a few short years. Both companies have seen Luke-warm demand for their stock post-IPO. Uber and Lyft have never been profitable.
One of the stated reasons that both Uber and Lyft have not achieved profitability is that the two companies have been locked in a battle over market share. If one company could achieve commanding market dominance, it could seal their fate for years to come.
Lyft went public on March 29 and their shares are currently trading 42% below the peak achieved shortly after their IPO. The company just announced their first results as a public company. Riders increased by7% in the quarter. But the company lost $1.1B for the quarter.
The picture isn’t that much different at Uber. The company went public this past week and they too are losing a breathtaking amount of money.
So here is why we are looking at these two companies. I speak with investors on a regular basis. I’m trying to imagine myself having a conversation with an investor where I tell them that we are going to have an operating loss of $8B dollars over before we transition to profitability. In the meantime, we’re going to focus on market share and when we have millions of customers we’re going to take the company public. We will all get rich from the IPO as new investors step in and buy new shares. The company will be worth billions.
I’m trying to imagine having that conversation with the most sophisticated angel investors in Silicon Valley and the top tier venture capitalists.
Now I’m perhaps being a little unfair because I doubt that the early conversations truly foresaw a future of $8B in losses followed by an IPO.
But here is what the broader market is saying to the likes of Uber and Lyft. We want to see profitability. The market has been extremely tolerant of companies like Netflix and Tesla, and Uber. Somehow these companies have been able to raise billions of dollars on a promise that hasn’t been proven. Part of that promise is profitability. Delivering the product and gaining market share is incredibly difficult and I applaud all of those companies that have managed to do so. But investors aren’t investing for the product or the service. They’re investing for profit, and profit is at the core.
The only way Uber and Lyft can achieve profitability is by raising fares. To maintain market share they need a price advantage compared with the traditional licensed taxis. If the price gap gets too narrow, then the number of riders will fall and we will see revenue fall. The issue always comes down to economic fundamentals. In the case of Uber, the critical concept is price elasticity of demand. If I’m looking for a drive to the airport, I evaluate the cost of the ride to the airport and back and compare that against the cost of parking my own car at the airport. If the ride is too expensive, I’ll take my own car.
Not only do those companies need to achieve operating profitability. They need to generate positive cash flow. I honestly can’t imagine proposing a real estate project to investors with the kind of blue sky dream that Uber and Lyft have been pushing for years.
Raising more money is prudent to extend the runway to profitability. But there are limits to the runway that most investors will consider reasonable. Uber has been operating for 10 years. In that decade they’ve generated 8 billion in losses. How do you spin that into a story for investors? Are you lining up for that investment? It wouldn’t be me. Now that they’re public, they will come under immense pressure to generate profits and cash flow.
When you evaluate your business, focus on profitability and cash flow.