Uber stock is bouncing after a rough start to the trading day, pulling Lyft upward alongside it as analysts outline the potential for both companies to improve the economics of their industry.
"Both Uber and Lyft have cited an improving competitive landscape, and we think challenging IPOs for Uber and Lyft may hasten more rationality from private global rideshare companies operating in new markets, though admittedly this could take time," Deutsche Bank analyst Lloyd Walmsley said. "The message continues to be one of moderating competition on 1Q 2019 earnings calls."
Indeed, the main issues for many investors avoiding the companies has been their propensity to burn cash in order to claw at market share.
With little product differentiation domestically and stiff competition for drivers, both companies have been compelled to cut prices to uneconomic levels to generate a sticky enough consumer and employee bases.
For example, Uber's 10-Q filing notes a staggering $1.03 billion in operating losses in the first quarter of 2019```````````````````````````````````````````````````` alone. That figure represents a near tripling of losses from the prior year as the fires of competition flared.
The benefit that Uber has moving forward is that the same cash burn issues and operating losses confronting the company are being felt by Lyft. Eventually, rationality takes over and each company must begin to price rides profitability as public market scrutiny increases.
"We see potential rationalization in the US from Lyft as a driver of upside for US ridesharing take rate," Morgan Stanley analyst Brian Nowak said. "We expect competitive intensity to stabilize/moderate as both players are now publicly traded and will (we anticipate) act as more rational regional duopolies."
Nowak set an "Outperform" price target alongside many of his fellow Wall street analysts, aided by the potential for a more peaceful relationship between these two fierce competitors.
One of the keys is that each company can now focus on expansion and increased market share based upon improved service and brand recognition rather than price cuts and discounts that ultimately hurt each respective business.
According to Oppenheimer research, leading into their respective IPO days Uber and Lyft were losing $1 and $2.65 per ride, respectively.
Clearly, that is an unsustainable business model that will need to shift for both companies and, judging by each company's comments in their first ever earnings calls, that trend is finally moderating to a more rational level.
In short, an armistice could be accelerant, for both.
However, it may be most encouraging for Uber, as it can curb the hemorrhaging flagship business in order to focus on both international issues and its potentially highly profitable Eats business.
"Assuming incentives decrease within Ridesharing now that both Lyft and Uber are publicly-traded, this would allow Uber to increased incentives for Eats," Oppenheimer analyst Jason Helfstein said. "Uber's business will likely become increasingly more focused around Food, as there is strong momentum in online food delivery adoption by consumers and the company continues to leverage its superior network liquidity."
He stated that Uber's competitive position against companies like Grubhub (GRUB) should be able to sustain the growth of the business segment and help it grow to the lofty valuations it first received ahead of the IPO.