It’s been fascinating to watch the dynamic between Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock since the two companies went public early last year. The two ridesharing companies are as popular as ever, yet their IPOs have been huge flops up to this point.
The latest drama in the ridesharing space is Uber’s failed buyout of food delivery giant Grubhub (NYSE:GRUB). GrubHub immediately turned around and merged with Europe’s Just Eat.
The way I see it, the ridesharing business is difficult and unpredictable enough. Food delivery just makes things even more complicated for Uber. That’s why I’m recommending LYFT stock instead.
Missed Opportunity
First of all, I don’t blame Grubhub for going with Just Eat. Reports suggest the Uber deal ran into antitrust hurdles. Only Grubhub management likely knows the extent of the issues. Regardless of whether the deal was dead from the beginning or Grubhub simply had a change of heart, it’s a huge missed opportunity.
Needham analyst Brad Erickson estimates a merger with Grubhub would have reduced Uber Eats’ net losses significantly. He estimates annual earnings before interest, taxes, depreciation and amortization losses would have dropped by at least $400 million.
“It wasn’t in our model or the Street’s but the road towards profitability certainly just got a bit more challenging at least near-term,” Erickson said.
There’s a reason why there are antitrust laws. Uber and Grubhub could have dominated the U.S. food delivery market and potentially leveraged significant pricing power. At this point, food delivery is a total money pit for these companies.
Uber Eats bookings were up 54% in the first quarter. But it also generated a net loss of $313 million in the first quarter alone. Losses could potentially be much worse in the second quarter due to Uber waiving restaurant fees and discounting prices due to the pandemic.
Food Delivery Competition Heats Up
Instead of gaining a stranglehold on the U.S. delivery market, Uber is now facing more competition than ever. Wedbush analyst Ygal Arounian says the competition for market share will be so fierce, it could even trigger a pricing war.
“Uber walking away at the altar from the Grubhub deal is a clear negative as competition and pricing pressure will be fierce going forward,” Arounian said.
A pricing war could put Uber in the lose-lose position of either losing market share or generating heavier net losses.
“We now see an elevated risk of a price war between Uber Eats and Grub looking ahead as [Just Eat] looks to further leverage this linchpin asset and go after market share within the US in Uber’s backyard, an uphill battle in our opinion,” said Arounian.
Investors do not want to see heavier Uber Eats losses as the business grows. And they certainly don’t want to see market share losses. This type of potential pricing war was likely exactly what Uber was trying to avoid when it made the bid for Grubhub in the first place.
Why I Like LYFT Stock
Meanwhile, LYFT stock investors have been watching all the food delivery drama from the sidelines. The ridesharing business alone is a difficult enough model to make profitable. At least LYFT stock investors don’t have a food delivery albatross weighing down the stock.
While Uber is managing food delivery, Lyft has been consistently gaining ridesharing market share from Uber. Lyft is also focusing on autonomous vehicle technology via a partnership with Alphabet (NASDAQ:GOOGL) AV subsidiary Waymo. AVs may end up being the golden ticket for the ridesharing business model, completely eliminating the cost of drivers.
Morningstar analyst Ali Mogharabi says Lyft staying out of food delivery is a positive for investors.
“We like Lyft’s relatively narrower focus on consumer transportation but still note that Uber has an edge on Lyft in terms of an earlier start, higher market share, and a stronger network effect around its services,” Mogharabi says.
Takeaway on Lyft Stock
The explosive growth numbers in the ridesharing business suggests the ultimate winners could be great long-term investments. But I’m a big fan of keeping things simple. Lyft is staying out of the complicated and costly food delivery business. Instead, it’s gaining market share on Uber in its core ridesharing business.
At this point, LYFT stock is the better pure-play ridesharing stock, and it doesn’t have any food delivery risk.
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 was long GOOGL.
