Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.
Uber and Lyft have been on quite a ride this year. After enjoying modest gains earlier this year thanks to an improved profitability forecast from Uber, the two companies saw their share prices gain ground after a difficult 2019. Then COVID-19 began to shutter the world, pushing its share prices so low that we recently felt compelled to write about their declines; losses that steep are material and can negatively impact private, on-demand startups as they hunt for new capital or an exit.
But then, late this week, it all turned around. Yesterday, Uber’s shares rose 38% and are up another 9% in pre-market trading. Similarly, Lyft rose 29% yesterday and is up nearly 8% this morning. What drove the up for American ride-hailing? An analyst call that Uber held yesterday, in which it told analysts that it has enough cash to get through just about anything in 2020. Ingrid Lunden covered the news as it happened for TechCrunch.
This morning let’s unpack what the company said and ask if it’s reasonable that investors are pushing Lyft higher alongside Uber. Then we’ll check the two firm’s new revenue multiples and think about what they mean for on-demand startups looking for capital or an IPO. Let’s go.
Uber’s call
Uber’s call had a number of points that we need to discuss, so we’ll summarize them below. What follows comes from TechCrunch’s listen of the call and a transcript of the event that we quote. You can listen to the call itself here.
Uber began its download to investors by stressing its liquid wealth. The company said that it is “fortunate to have a strong cash position with about $10 billion of unrestricted cash as of the end of February” of this year. Investors are likely glad to know what that number was heading into March, a period that has seen deterioration in the global ride-hailing market. (Uber also noted a modest M&A spend compared to its aggregate cash position, and that its debt isn’t an issue for some time, giving it more short-term breathing room.)
So that’s the company’s bank account. How about its current business? In Seattle, the company’s ride-hailing business is off 60% to 70% compared to the year-ago period. Recent negative impacts have been more modest in Latin America, Uber says, and in some markets like Hong Kong, it is already seeing ridership creep back up, showing demand returns for Uber’s ride-hailing model as cities get back on their feet,
But while Rides is down sharply, Eats, Uber’s on-demand food delivery service, is growing even in markets like Seattle where ride-hailing is down sharply. The company also highlighted momentum in securing new restaurants for Eats both in terms of its in-house sales team and its self-serve website.
So Uber has a lot of cash, ride-hailing is struggling (but the company expects an eventual recovery) and Eats is a bright spot. But if Uber was sharply unprofitable before this disruption, surely it’s going to be even less profitable going forward until normalcy returns.
Uber gave investors an “extreme edge-case scenario” in which its Rides business drops 80% and stays there. While it said that it didn’t anticipate that happening, the company forecasted it would wrap 2020 with $4 billion in unrestricted cash and access to a $2 billion revolving credit line. In a more likely scenario — at least in the company’s view — with Q2 bringing the low-point for many markets and a “recovery beginning in Q3,” Uber expects to wrap 2020 with 50% more unrestricted cash, some $6 billion, and the same $2 billion in open, revolving credit.
Finally, Uber told investors that its cost structure is variable (implying that its costs will decline with revenue, leading to lower-than-one-might think unprofitability from falling revenue), and it is taking other steps like temporarily stopping hiring and cutting nine-figures worth of marketing costs to keep things running smoothly.
Investors heard all of that and were happy as hell, bidding up its shares (perhaps they expected worse when they pushed Uber to record lows earlier in the week). You can certainly quibble with Uber’s level of optimism, finding it either too high or too low; regardless, what seems clear is that Uber expects to close out this year with lots of cash and, hopefully, a do-over of 2020 in 2021.
COVID-19 is far from behind us, but we now know how one company impacted by it expects to survive: burning through $4 billion in cash in 10 months, which works out to $400 million per month or about $13.3 million per day every day for the rest of the year.
So can Lyft do the same?
Two peas in a pod
Investors seem to think that the smaller American ride-hailing company is in a similar position. Recall that we noted at the beginning that Lyft had also seen its shares fall this week before catching Uber’s tailwind yesterday.
Let’s peek at Lyft’s most recent numbers to get a handle on why that might be the case. Here’s where Lyft left things at end of Q4 2019:
- Q4 2019 net loss: $356.0 million
- Q4 2019 adjusted net loss: $121.4 million
- Cash and equivalents (not including restricted cash): $2.85 billion
- Negative free cash flow (operating + investing cash flows) in Q4 2019: $139.3 million
Before COVID-19, Lyft had lots of cash compared to how quickly it was burning it. That fact, coupled with better-than-expected growth results in recent months, had previously buoyed Lyft’s shares. Notably Uber’s free cash flow appears to be worse than Lyft’s when looking at its Q4 figures and adjusting for scale using Uber’s 2019 full-year operating and investing cash flow results, less their year-to-date totals given in Q3 of the year. (This is likely imperfect but works fine for our needs this morning.)
So even if Lyft doubled its free cash flow burn for two quarters, it would still have plenty of cash in Q4 when, theoretically, it would start coming out of its current slump.
Therefore, eyeballing the numbers as best we can, it appears that Uber’s forecasts points to a future in which both itself and Lyft will make it out of the woods. Both ride-hailing companies will be far thinner and less wealthy, but alive and with enough cash to try to get closer to GAAP profitability.
Speaking of which, what about profitability? Uber’s saying both externally and internally implies that it expects to reach its Q4 adjusted EBITDA positivity target. That’s bold. If the company manages to meet that benchmark, it will have earned some goodwill with the street that will stick; Lyft’s profitability promises haven’t changed as much, leaving them further in the future and therefore easier to meet.
Got all that? Now onto the startups.
What about DoorDash?
After a pretty bad start to the week, with Uber and Lyft shares in free fall, two days of big gains from Uber (which competes with food delivery apps) and Lyft must be welcome for DoorDash and Postmates, two on-demand companies that have filed privately to go public; both IPOs were considered more provisional than definite, even before their public comps lost much of their value.
Now with Uber and Lyft on the bounce, DoorDash and Postmates have had some weight lifted from their shoulders. Didi, GoPuff, and other global on-demand services are also likely happier than they were. And, to a smaller degree, we’d assume Lime and Bird are as well. Nice to see some good news for those companies, even if it comes after some pretty bad news.
And that’s that. Trading begins soon, so I’ll wrap this up. We’re keeping a close eye on both companies, so expect more coverage as their business and equity prices keep changing.