Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
A few weeks ago, Uber and Lyft, kicking bags of the 2019 stock market and regularly cited as examples of venture-backed excess, were back to fighting form.
After encouraging Q3 2019 reports from both ride-hailing giants that included fresh profitability promises and timelines, Uber upped the ante by moving its profitability goal up when it reported Q4 results earlier this year. Shares of the famous company rallied. When Lyft failed to mimic the declaration in its own Q4 earnings report, it was dinged by investors. But from the time of their Q3 2019 earnings reports to recently, Uber and Lyft were coming back up for air.
Suddenly, it was perfectly reasonable to be optimistic about the two ride-hailing companies that had become more famous for their sticky losses than their growth potential; as the pair had matured from upstart to public company, their money-losing methods appeared increasingly permanent, making the Q3 2019 and Q4 2019 profit declarations investor balm.
But after the rally came the novel coronavirus and COVID-19. Since then, the two companies have lost huge amounts of ground. Their shares fell 9.8% (Uber) and 11.8% (Lyft) yesterday alone. In pre-market trading this morning, they are down even more. I wanted to get my head around what could be causing this, so let’s run through each company’s most recent profit forecasts, results, share price gains and losses, and what investors are telling the world through their recent selloff. (Hint: DoorDash’s IPO probably isn’t happening soon.)
Promises, results
To keep this digestible, we’re going to cover a lot of ground somewhat quickly. I’ll link a bit more than usual so that you have the resources you need to explore. And if any of this feels like common knowledge and therefore skippable, bear in mind that some folks don’t spend all their time online!
Let’s begin with Q3 2019. This was the quarter in which both Uber and Lyft made profit promises that began to calm investor nerves about their future viability:
- Lyft grew revenue more quickly than expected ($955.6 million, up 63 percent from $585.0 million and beating expectations of $915 million).
- Lyft lost less money than expected (adjusted net losses $121.6 million, down 50 percent from $245.3 million and better than expected on a per-share basis).
- Lyft announced that it would generate adjusted earnings before interest, taxes, depreciation, and amortization, by Q4 2021.
Uber’s Q3 had a similar arc:
- Uber grew revenue more quickly than expected ($3.81 billion, up 30% from $2.94 billion and beating expectations of $3.7 billion)
- Uber lost less money than expected (net losses of $1.16 billion, up 18% from $986 million, but smaller on a per-share basis than investors anticipated)
- Uber announced that it would generate full-year, positive adjusted EBITDA in 2021.
That’s a great set of results, at least in contrast to what investors at the time expected. In the wake of the results, shares of Uber and Lyft found their bottom and rose.
When Uber reported its Q4 2019 results in February, the firm beat expectations once again. And with rising adjusted revenue and falling adjusted losses, the American ride-hailing shop made a new promise in the form of an observation:
“Our progress in 2019 and our 2020 plans gives me the confidence to challenge our teams to accelerate our EBITDA profitability target from full-year 2021 to Q4 2020.”
Uber rallied by several dollars per share. A second quarter of better-than-expected results and an improved profit forecast was aces as far as investors were concerned. Lyft reported shortly after, enjoying a post-Uber earnings share price bump. After reporting better-than-anticipated results, Lyft shares fell. Why? As TechCrunch reported at the time:
Then, last week, Uber messed everything up for Lyft by dramatically improving its profit timeline to generating positive EBITDA in Q4 2020. That would put Uber in the (heavily adjusted) black a year before Lyft expects to repeat the feat. Today, when Lyft reported its results, the company wasn’t merely trying to beat its own projections and what the street promised.
Instead, Lyft was dealing with a changed investing landscape: Uber had told investors that profitability was just around the corner. And then Lyft took its turn at the podium and didn’t move its adjusted profit forecast from eight quarters in the future closer to today. It’s still out there. Investors were not enthused.
This brings us to the recent weeks. Let’s examine the damage.
Down
The recent selloff of Uber and Lyft stock has been sharper than I thought it was:
- Shares of Uber peaked at a little over $41 this year, are worth $26.24 before trading today, and are currently priced to open at $22.67.
- Shares of Lyft peaked at around $54 this year, are worth $29.01 before trading today, and are currently priced to open at $24.71.
That means Uber is off 44.7% from recent highs if it opens today where it is currently trading. Lyft is off an even steeper 54% over the same timeframe.
That’s about half the value of each company since mid-February, or about a month—an extreme market reaction to the two companies. (TechCrunch has emails into each firm asking about their current profitability promises, and if they are still in place. Neither company is going to comment on the record; if they do say anything, it will come as a note on their investor websites.)
In regards to why this is happening, I suspect investors are concerned about one issue that manifests as a logical sequence:
- The supply-demand balance that the firms depends on could break down, with either supply (drivers) or demand (riders) drying up, or both simply declining.
- That breakdown would lead to falling revenues, slipping gross profit, and, therefore, delayed profitability.
Investors cheered advancing profits, so it makes sense that potentially receding profitability timelines are souring sentiment on the two firms. At least, that’s what the markets are telling us; no company drops 50% because investors are suddenly more bullish about their prospects.
For on-demand startups, including the late-stage Postmates and DoorDash, the news isn’t great. Uber and Lyft are seeing their revenue multiples compress in real time, potentially repricing yet-private firms in a manner they don’t approve of. If the Postmates IPO was in limbo and the DoorDash IPO felt optimistic before, surely both situations are now worse.
There is an optimistic take, however. In the time of COVID-19, perhaps the demand for startups that deliver goods to doors will rise—assuming food spots stay open and delivery contractors are willing to drive. Yes, that’s incredibly macabre to say, but, hell, it’s 2020 and the rules have broken down.
More later today as the markets tell us how scared they are.
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