Uber Technologies (UBER) and Lyft (LYFT) are great companies, but they have a common problem: a string of money-losing quarters, which extends to well before the pandemic outbreak, and makes them less-than-ideal investments.
Since it went public back in the spring of 2019, Uber’s stock has gained a meager 4.64 percent, while Lyft’s stock has gained 2.14 percent, compared to a whopping 82 percent gain of NASDAQ.
The Root of the Problem
The root of Uber’s and Lyft’s problem can be traced to fundamentals, specifically the business model of these two companies. The lack of service differentiation creates zero loyalty among their customers, who frequently switch between the two based on service times. (See Uber stock charts on TipRanks)
Any car that is used to drive customers is likely to have both a Lyft and an Uber sticker in the window, highlighting the lack of differentiation between their services. (See Lyft stock charts on TipRanks)
The lack of differentiation brings the two companies into an unwanted situation: price competition.
Economists have a good explanation as to how this happens. While the market for the two rideshare apps could work as a duopoly in theory, it instead works as perfect competition in practice.
That’s a market where consumers have perfect information on the quality and the price of services, pitting one seller against another—Uber against Lyft in this case.
The companies have no pricing power, so they earn a “normal” profit in the long run.
Can the Problem be Fixed?
Uber and Lyft have been trying to fix their fundamental problem by investing in drivers and innovation to enhance their value propositions.
Here’s a quote from Dara Khosrowshahi, CEO of Uber, following the report of Q2 results.
“In Q2, we invested in recovery by investing in drivers, and we made strong progress, with monthly active drivers and couriers in the US increased by nearly 420,000 from February to July. Our platform is getting stronger each quarter, with consumers who engage with both Mobility and Delivery now generating nearly half of our total company Gross Bookings.”
Logan Green, co-founder, and chief executive officer of Lyft, is on the same page. “We had a great quarter. We beat our outlook across every metric, and we have growing momentum. Since our inception, we’ve worked hard to defy the odds with a deep belief in our mission. We’ve consistently innovated and made big bets, and this is just the beginning. We want to improve people’s lives with the world’s best transportation, and we will continue working to deliver on this goal.”
Christoph Meyer from the Center of Automotive Research at Stamford sees another way the two companies can fix fundamental problem: personalized pricing. That’s a pricing policy wherein the two companies charge riders the maximum price — known in economics as the reservation price — but enable that price to be different for every customer, even as the customers receive an identical good or service.
“While companies have caused outrage in the past with surge/prime-time pricing, they hold even greater power going forward,” says Meyer. “Having moved to partially mask surge pricing and continuing to collect greater amounts of data on its customers, these transportation companies have the potential to achieve one of economics/business’ holy grails: perfect price discrimination.”
Will these solutions work? It’s still too early to say.
Wall Street Weighs In
Meanwhile, the analyst community is bullish on the shares of the two companies. The 22 Wall Street analysts following Uber Technologies have an average 12-month price target of $68.76, with a high forecast of $81.00 and a low forecast of $81.00. The average Uber price target represents a 58.07% increase from the last price of $43.50.
Likewise, the 20 analysts following Lyft have a 12-month average Lyft price target of $76.24, with a high forecast of $88.00 and a low forecast of $59.00. The average price target represents a 41.58% change from the last price of $53.85.
Summary and Conclusions
Uber and Lyft are good companies but not sound investments. They create tremendous value for customers, but they don’t generate any value for stockholders. The root of this problem is the lack of service differentiation of the two companies’ business models, as they engage in price competition.
This situation can change over time, through innovation and the application of personalized pricing. At least that’s what the two companies’ management and some economists think is the right solution.
