I last wrote about Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) stock back in October. At the time, I urged Uber stock investors to consider a ridesharing pair trade by shorting Lyft stock. Since that time, Uber stock is up 28%, while Lyft stock is up 18%, netting a 10% gain for that trade while limiting downside risk.
At this point, I believe the pair trade has run its course. Uber and Lyft are both extremely high-risk speculative bets. Following the recent outperformance of Uber stock, I no longer see it as the safer play.
In the fourth quarter, Uber reported a net loss of $1.1 billion, slightly better than the $1.2 billion loss it reported in the third quarter. Revenue growth was 37%, up from 30% a quarter ago.
In the same quarter, Lyft reported a net loss of $356 million, significantly better than its $463 million net loss in the third quarter. Revenue growth was 52% compared to 63% in the previous quarter.
In a nutshell, Uber’s revenue growth bounced back a bit in the quarter, while Lyft’s continued to erode. However, Lyft is still outgrowing Uber by a significant margin, suggesting it is gaining market share. Both Uber and Lyft improved their loss situation in the most recent quarter. Lyft shaved off a higher percentage of its losses than Uber did, but Lyft is still losing more money per share.
Outside of those numbers, the rest of the Uber and Lyft bull thesis is mostly just a story. The two companies are hemorrhaging cash, but investors believe that will change at some point in the future. It certainly didn’t change in the fourth quarter.
But the only reason why Uber stock is up and Lyft stock is down since earnings is because Uber management changed their story a bit, while Lyft did not. Lyft had previously told investors it will be profitable by the end of 2021. Uber had told investors the same thing until this month, when it changed its profitability target date to the end of 2020.
What Has Changed?
As soon as Uber stock and Lyft stock hit the public market last year at IPO prices of $45 and $72, respectively, I told investors to stay away. The two companies were plagued by slowing revenue growth and huge losses. Investors were simply putting their faith in a story management was telling them about how things will get better in the future.
So what has changed from that situation in nearly a year? To me, the most significant changes are the stock prices. Uber is now trading at $41.25, down about 8.3%. Lyft is trading at $48.46, down 32.6%.
The other thing that has changed, as I said before, is the story. Uber management’s story is now that it will be profitable a year ahead of Lyft. Of course, this isn’t “real” profitability. It’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) profitability. Warren Buffett’s long-time right-hand man and Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) vice chairman Charlie Munger expressed his disdain for EBITDA in an interview this week.
“I don’t like when investment bankers talk about EBITDA, which I call bulls— earnings,” Munger said. “Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You’re almost announcing you’re a flake.”
In other words, Uber said this week it will hit its bulls — milestone before Lyft hits its bulls — milestone. Who cares?
How to Play Uber Stock and Lyft Stock
Profitability has become the new trend among growth stock investors because of the flood of unprofitable growth stocks to hit the market in recent years. Investors need to decide which they want–growth or profits
What do Uber and Lyft’s arbitrary profitability targets really mean when the target is so far in the future and there are so many unknowns between now and then? Just this week, a judge denied Uber’s attempt to block California’s AB5 law that could slam Uber and Lyft with massive new costs. How will the driverless vehicle technology race unfold in the next two years? How will partnerships and outside investments impact these two companies?
For now, all investors know for sure is growth rates. The rest is just a story. Lyft is growing at a 52% rate, while Uber is growing at a 37% rate. Lyft stock is trading at a significantly larger discount to its IPO price. If you’re a high-risk trader that wants to dip a toe in, pick the story you like best. I no longer see Uber stock as the better alternative given the recent price action. But I still need to see more progress from both companies to recommend buying.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.