Lyft, Inc. (LYFT) may be leading the market after its IPO on Friday, but its chief rival in Uber is still one of the most hotly anticipated offerings expected this year.
In a duopoly such as the one that appears to exist in the New Age ride-hailing industry, even investors who feel comfortable investing in both companies almost always have a favorite.
Now we can add Uber and Lyft to those classic examples, and it's time for investors to select a favorite.
Vetting the Valuations
The first thing to catch investors' eyes, and part of the reason there is so much excitement surrounding the offerings, is the massive valuation set by both.
The valuation put forth on Lyft Friday morning was set at over $24 billion, nearing the valuation fetched by e-commerce king Alibaba Group Holding Ltd. (BABA) only a few short years ago.
Meanwhile, Goldman Sachs is forecasting a mammoth $120 billion valuation for Uber's eventual debut, placing it atop the totem pole for the biggest IPO ever.
The valuations may seem outrageous at first glance, especially for as of yet to be profitable companies. But the addressable market for ride-sharing brings a compelling case into play that these big figures may indeed be fair.
"The ride-sharing industry has become one of the most transformational growth sectors of the US consumer market over the past five years," Wedbush analyst Daniel Ives said on Friday, speculating the total market could eclipse $1.2 trillion annually.
He set Uber as the No. 1 dog in the global market, but noted that Lyft is a close No. 2, and has done a solid job cultivating customer loyalty.
"To this point, [Lyft's] market share in the US that has grown from 22% to 39% (2016 to 2018) as Lyft facilitated over 619 million rides (65% year over year growth) in 2018, and serviced over 30 million riders and roughly 2 million drivers on its platform, an impressive feat with this week's IPO a watershed event for the industry," Ives noted.
Still, even his bullish outlook was stretched thin as Lyft shares leaped more than 20% in morning trading.
"Lyft is an attractive name to own to play this transformative ridesharing market opportunity, however at levels above $80 we find it hard to be bullish on the name given the risk/reward we see for shares," he advised.
Uber meanwhile has fielded concerns that its colossal valuation leaves it with little upside upon IPO as well, making it less likely to experience the acceleration seen in its chief competitor's stock. That has left many buying into the underdog name Lyft on the valuation perspective.
"Uber has run up a lot. It's a bit rich in valuation and seems to be priced to perfection," Santosh Rao, Head of Research at Manhattan Venture Partners said. "Lyft has more upside than Uber does."
However, part of the story to Uber is that it is not simply a ride-sharing company, differentiating it slightly from Lyft.
The company has also taken a stab at Grubhub Inc.'s (GRUB) traditional stomping ground of delivery services with the UberEATS app.
The food delivery service is rumored to have already added $20 billion to Uber's total valuation, but it could be a growth story within the growth story of Uber, especially given its already bulky base of drivers available to fulfill orders.
The valuation is ambitious, given Grubhub is currently fetching a valuation below $10 billion, and potential rivals Postmates and Doordash demanding $2 billion and $7 billion respectively according to private market estimates.
Of course, online food delivery is a growing industry and the valuations of all of those companies could carry forward as well, but the valuation would currently ask Uber to supplant nearly all rivals in this area to justify the lofty valuation.
Boosting the valuation on all aspects for Uber and Lyft are the markets that are currently unsaturated, whether it be in the delivery or ride-sharing business.
Most recently, Uber stated its intention to be a world leader in ride-hailing with a $3.1 billion blockbuster takeover of Dubai-based ride sharing rival Careem.
"This is an important moment for Uber as we continue to expand the strength of our platform around the world," said CEO Dara Khosrowshahi at the time. "With a proven ability to develop innovative local solutions, Careem has played a key role in shaping the future of urban mobility across the Middle East, becoming one of the most successful startups in the region."
The aggressive ambitions on Uber's behalf outweigh the partnership focus of Lyft, which has been built around deals with existing names in international markets in the past while it continues to focus on the U.S. market.
"Sticking with that playbook of owning this market (North America) and expanding in this market is how we get to deliver to our public shareholders and the long-term expectations that we set," Lyft chairman Sean Aggarwal said after the stock's debut, according to The New York Times.
At the moment, it looks like only one of the two companies is keeping its eyes abroad.
That said, Uber has not always been successful, despite its well-laid global growth plans, and has instead been forced to sell many of interests in emerging markets after running into rivals not ready to let the U.S.-based company take their crown.
In China, Uber sold its operations to Didi Chuxing after taking losses on the service and failing to oust the domestic UCar rival.
In Russia, Uber sold its business to search giant and fellow autonomous car innovator Yandex N.V. (YNDX) , in a deal valued at $3.7 billion, that gave Uber a 36.6% stake in the merged entity.
And in Southeast Asia, Uber sold to Grab amidst the protests of Singaporean regulators, again gaining a stake in a new company rather than crushing the competition there.
It has also been banned from markets like the Czech Republic after the protest of taxi drivers in the country.
As such, its new Careem bet should not be taken as a sure thing, even if the buyout is suggestive of a slight change in strategy on entering a new market.
Aside from the foreseeable innovations that each company can make, there is one futuristic ambition that could far outweigh any of the currency achievable aspects of each business.
That key is autonomous driving.
According to Manhattan Venture Partners, 70 cents on each dollar that ride-sharing companies make goes back to the drivers. As such, the current lack of profitability seen in each company, which has raised as a major concern among more cautious investors, could be reversed with a single breakthrough.
The issue for those selecting Lyft as the stock with more significant upside is that Uber has been a much more prominent player under its own umbrella through its Uber Advanced Technologies Group.
Wedbush's Ives said "the next generation autonomous driving, arms race with Alphabet Inc.'s (GOOGL) Waymo, and others well ahead of the company from an R&D perspective, despite its Las Vegas fleet of autonomous vehicles," poses a significant risk to Lyft.
To be sure, while Uber has made significant strides without relying on partnerships, it has had some high-profile hiccups. Not least of these was a pedestrian death at the hands of an autonomous vehicle it operated in Arizona.
The mishap led to Uber discontinuing its projects for much of 2018 before resuming in December.
"We implemented recommendations from our review processes, spanning technical, operational and organizational improvements. This required a lot of introspection and took some time. Now we are ready to move forward," Eric Meyhofer, Head of Uber Advanced Technologies Group said upon the reopening. "We will continue to prioritize safety and proactively communicate our progress until we've built a self-driving system that lives up to the promise of making transportation safer and more affordable for everyone."
The company now operates testing in both the U.S. and Canada, continuing efforts that could make margins explode.
Lyft may be a bit late to the party, but it recently branched beyond simply partnering with some of the automakers, some of which have carved out big stakes in its IPO, like General Motors Co. (GM) and Ford Motor Co. (F) . In late October, the company announced the acquisition of London-based virtual reality player Blue Vision Labs to bulk up its own, in-house efforts.
"We believe that gaining a detailed understanding of the world is the key requirement for achieving a safe and scalable self-driving platform," Peter Ondruska, co-founder and CEO of Blue Vision Labs, said upon the announcement. "We are very excited to be working with Lyft to contribute to their efforts in enabling the future of autonomous mobility."
So early on in the autonomous driving revolution, it will be hard to pinpoint a winner, especially as Waymo appears to be the farthest along and could easily disrupt either, or both, companies.
Investigating the Investors
Waymo's strides could actually bode better for Lyft, however, as its corporate parent, Alphabet, has invested early and often in the San Francisco-based ride-sharing company.
The tech and automaker concentration among Lyft's investors is indicative of a company choosing its partners wisely, and allowing itself to benefit from, rather than race against, symbiotic industries.
Uber, meanwhile, has the backing of many Wall Street elites, maybe explaining its exorbitant valuation in comparison to its proverbial little brother. Goldman Sachs Group, Inc. (GS) , Morgan Stanley (MS) , and BlackRock, Inc. (BLK) are among the most prominent names.
A tech focus has also come to the fore with Uber nonetheless, with Amazon.com. Inc. (AMZN) frontman Jeff Bezos, SoftBank Group Corp.'s (SFTBF) Vision Fund, and Tencent Music Entertainment Group (TCEHY) hitching a ride ahead of its own offerings.
It's always important to note the smart people behind smart deals. Both companies certainly seem to have that going for them.
Public Relations Risks
Outside of the business realm, there always exists ancillary issues, namely from regulators and the general public.
Lyft may end up having the second mover advantage in this aspect, as it has avoided much of the ire of taxi lobbies, regulators, and bad press that has been directed at Uber.
Most prominent are the many issues of the company's founder, Travis Kalanick.
The founder and former CEO was embroiled in numerous controversies related to claims of sexual harassment and general childishness, as well as his ties to the Trump administration and the troubled advisory council the president formed.
Additionally, the company has dealt with numerous allegations of spying on passengers and rivals, including Lyft. The controversy was most calamitous after reports that the company spied on celebrities, politicians, and partners of employees able to utilize the "God View" feature.
Beyonce was among the high-profile names looked in on by voyeuristic employees.
That scandal quickly slipped into the next, involving lawsuits alleging theft of Waymo technology, shortly before its autonomous driving failure, and of course the ever present criticism of underpaying drivers and collapsing cab driving job markets in each metropolitan area it moved into.
Kalanick famously berated one of his own employees when he was confronted with the question of fair pay for work.
New CEO Dara Khosrowshahi has worked diligently to shift the narrative on the company, but the stains of such a checkered past are never removed so easily with a change in management, especially when much of the trouble emanates from a founder.
The lack of comparable issues in Lyft make it probably the more attractive company, at least from a PR standpoint.
With the excitement surrounding Lyft Friday, it is reasonable to expect much of the same adulation for Uber's eventual listing.
It will be up to investors to decide which company they prefer to ride with, as both compete to find a path to profitability in the duopolistic space. At least investors can now make an educated evaluation and not get caught up in the IPO euphoria.
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