Heading into earnings season, you might have expected Uber and Lyft to suffer.
After all, global travel slowed toward the end of Q1, so how could these companies have done well? Continuing the same line of thinking, given that they are both unprofitable and are valued more on growth than trailing earnings, with growth slowing would there be much to celebrate?
The answer was a resounding “yes.” Uber and Lyft both rallied toward the end of last week following their successive earnings reports.
Today, let’s go back and remind ourselves how Uber and Lyft performed against Q1 expectations and what they said about the hits they took in March (Q1) and early April (Q2). Then we’ll ask ourselves why their shares rallied despite telling investors that their businesses had begun to fall sharply in the COVID-19 world.
(And, no, the answer to everything isn’t Uber Eats. More on that at the end.)
Expectations
Lyft reported earnings first, telling investors its Q1 results on May 6. Here’s how they stacked up:
- Lyft lost $1.31 per share against revenue of $955.7 million in Q1.
- The firm missed expectations on profit (-$0.64 expected), and beat on revenue ($897.9 million expected).
Uber reported the next day. Here are its top-line numbers from May 7:
- Uber lost $1.70 per share in Q1 against revenue of $3.54 billion in Q1.
- The firm missed expectations on profit (-$0.83 expected), and beat slightly on revenue ($3.51 billion expected).
Given those results’ plus-and-minus nature you might have expected Uber and Lyft to trade flat afterwards; nothing could be further from the truth. Indeed, if we calculate from the close for each company before Lyft reported on the 6th to where they closed on Friday, May 8, you’ll note a pattern:
- Lyft close of trading on Wednesday through the close on Friday: +25.3%
- Uber close of trading on Wednesday through close of trading on Friday: +17.9%
Heading from large profit misses in the preceding period into a quarter in which both companies are expected to shrink, we see their share prices rising sharply. Wild, right? It turns out investors had something more interesting in mind than known — or at least expected — issues in Q2.
Let’s turn to what both companies said about things getting better. From a transcript of Lyft’s earnings call (bolding: TechCrunch):
Here are the facts: in mid-March, we began to experience a sharp decline in rides as various authorities across North America issued guidelines and orders for residents to minimize time spent outside their homes and apartments. For the month of April, rideshare rides were down 75% year-over-year. Ride levels appear to have stabilized, seeming to have reached a bottom in the second week of April.
We have since seen three consecutive weeks of week-on-week growth, but clearly this is from a low absolute ride base and rides last week were still down more than 70% year-on-year.
Lyft has seen what it considers the bottom in ridership (-75%) and after stabilizing, has started to see growth. Slow growth, mind, as that same metric is now an improved -70%. Still, it appears that Lyft’s U.S.-focused ride-hailing business did not go to zero, is not going to zero and is starting to claw its way out of the muck.
Next let’s turn to notes from Uber’s earnings call (editing from original and bolding: TechCrunch):
Finally, I want to talk about what we’re seeing in our Rides business today, and I won’t sugarcoat it. COVID-19 has had a dramatic impact on Rides with the business down globally around 80% in April. Still, there are some green shoots driving restrained optimism. We’ve seen week-on-week growth globally for the past three weeks. This week is tracking to be our fourth consecutive week of growth.
Last week, we saw 9% trip growth and 12% gross bookings growth globally week-on-week. We believe that US is off the bottom. US gross bookings were up last week by 12% overall week-on-week including New York City up 14%, San Francisco up 8%, Los Angeles up 10%, and Chicago up 11%. Perhaps more interestingly gross bookings in large cities across Georgia and Texas, these are two states that have started opening up significantly are up substantially from the bottom at 43% and 50% respectively. Hong Kong is back to 70% of pre-crisis gross bookings levels. And in India, we began operating again in designated green and orange zones, which account for more than 80% of the country’s 733 districts.
Uber went into a bit more detail (its ride-hailing business is global, so there is more nuance to its figures), but the gist is the same. The company saw a huge (80%) drop in its ride business (versus Lyft’s -75% change) and has also seen growth for the past three weeks.
CEO Dara Khosrowshahi did give investors another bit of daylight, saying that his company “believes the disruption caused by COVID-19 will impact our timeline, but by a matter of quarters and not years.”
Green shoots, indeed.
Happy investors
Uber and Lyft will lose lots of money in Q2.
Lyft told investors that at the upper-end it can foresee a Q2 adjusted EBITDA loss of $360 million. That is many dollars. However, with their main drivers of revenue and margin coming back — and both companies having cut staff recently — you can begin to see why investors are less glum than they might have been.
On the other hand, both Uber and Lyft are probably going to post negative year-over-year revenue growth in 2020. And they will spend lots of cash making it to the other side.
You may consider it a little hard to get stoked today about a company that is going to dip sharply and torch cash along the way and, if the economy recovers as some expect, will wind up whole on the other side. Investors bidding up their shares so sharply after earnings appear to make a more bullish case than that, however.
By that logic we’d want to find something else to hang an optimistic take on. Here are two ideas:
- Costs are permanently cut. Perhaps investors are expecting Uber and Lyft to come out of this crisis leaner than before, anticipating that their cost structures will not return to their prior size. This could boost adjusted and net profit margins, making the two companies’ future cash flows more attractive.
- Uber Eats works out. This doesn’t pertain to Lyft, but Uber Eats is growing and not losing too much more money. In time it could lose even less. Over a sufficiently long time frame it could even make money. This would do two things. First, make Uber more profitable during good times. And two, help the company whether any future, similar shocks. This presumes that customer behavior doesn’t revert after quarantines are lifted.
But even with those wins, a return to year-over-year growth is a ways off.
Uber’s Q2 2019 Rides adjusted net revenue was $2.3 billion. Let’s say the company manages to get to -60% in the current quarter (Q2 2020). That would work out to $920 million in adjusted net Rides revenue, for those doing the math at home. It’s going to take a hell of a lot of less profitable Eats top line to plug the implied hole.
This entire piece is not an exercise in asking “what the fuck?”, though it might seem that way. Instead, it’s an attempt to understand the situation and why some folks are reading the tea leaves — as trading patterns appear to indicate that they are — as bullish. If you are convinced or not, you know what to do.
