Uber (NYSE: UBER) doesn’t appear to have a plan for being profitable anytime soon, and Uber stock is a losing proposition under nearly any circumstances.
I’ve repeatedly told investors to stay away from ridesharing IPOs stock and Lyft (NASDAQ: LYFT) stock. In five months, UBER stock price is now 33% below its IPO price.
In a little more than six months, LYFT stock is now down about 45% from its IPO price. I’m still not a fan of either stock given their mounting losses and unclear paths to profitability and sustainability.
However, for investors who are determined to play the ridesharing stocks, Uber stock is the only one I’d recommend buying.
What’s Wrong With Ridesharing Stocks?
All it takes to get a sense of what’s wrong with ridesharing stocks is a quick look at quarterly earnings. Uber shares tanked after the company reported a record second-quarter net loss of $5.24 billion, much higher than analysts had anticipated. Losses were 30% higher than in the first quarter.
Lyft didn’t fare much better, posting a net loss of $644 million.
To make matters worse, revenue growth at both ridesharing companies is already slowing. Investors cheered the fact that Lyft’s revenue growth slowed less than anticipated in the third quarter. It’s now at around 62% year-over year, down from more than 100% growth last year.
To make matters worse, at a time when ridesharing stocks are struggling to prove a long-term path to profitability, costs may soon be on the rise. California’s AB-5 will soon require Uber and Lyft to classify its drivers as employees rather than independent contractors. That transition will force Uber and Lyft to pay for benefits and all the other costs associated with employees.
Other states may soon follow suit. The end result could be a domino effect that sweeps the nation.
Some analysts believe Uber and Lyft will ultimately negotiate some sort of legal compromise in California. Regardless, the finish line of profitability for ridesharing stocks will soon be even farther away.
Why UBER Stock Over Lyft?
Lyft has a higher growth rate than Uber and is gaining market share. But Lyft has more exposure to AB-5 and California, which represents 24% of Lyft’s total revenue. Uber is a bit more insulated from California at just 17% of total revenue.
Most importantly, Uber is a much more diversified play. Uber Eats and Uber Freight are in the early growth stages. Uber is also investing in scooters, bikes and even flying taxis.
Citi analyst Itay Michaeli recently upgraded UBER stock from “neutral” to “buy.” Michaeli says the market seems to be assigning zero value to Uber’s non-core businesses.
“Our new [sum-of-the-parts] framework values Rides at ~$31-32/share, implying that Uber shares currently ascribe no value to Eats, Other Bets and minority holdings,” Michaeli says.
Michaeli says Uber’s positioning in the autonomous vehicle technology race has improved this year as well.
“Also potentially overlooked are the potential benefits from next-gen vehicles (EVs ADAS platforms) that could further unlock the profit pool while offering opportunities to address current industry issues,” he says.
The Bottom Line on Uber Stock
For the record, I’m still not a fan of UBER stock in the near-term. Both ridesharing companies still appear to be several years away from profitability in a best-case scenario. Plenty can change in a couple of years. If these companies can’t turn a profit in a booming economy, what will happen when the economy inevitably slows down?
However, Uber’s position as the market leader and its business diversification and growth opportunities make it the safer bet to me. It also has less immediate exposure to AB-5 than Lyft.
The only way I would recommend buying UBER stock is the only way Uber buyers would have made a profit in 2019. By making Uber the long side and Lyft the short side of a pair trade, investors can simply make a bet that UBER stock will continue to outperform LYFT stock.
Since Sept. 1, UBER stock price is down just 7.5%. LYFT stock is down 19.3% in that time. Pair traders would have turned an 11.8% profit in that stretch rather than taking that that 7.5% Uber loss.
Even if you’re a Lyft bull over Uber, I’d still recommend taking this pair trade approach. Yes, it eats into profits if both stocks rise. But there is simply too much risk to go all in on either of the ridesharing stocks at this point.
By picking a winner and playing it against its rival, investors are eliminating much of the risk associated with whether or not ridesharing will ever be a business model that works in the long-term.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
