Uber and Lyft's Surge Pricing Looks Excessive -- Heard on the Street

By Laura Forman 

Consumers avoided ride-sharing last year like, well, the plague. Investors are acting as if there won't be any lasting damage.

Last spring, business evaporated overnight and Lyft said ride-share rides were still down by more than 50% in January from a year earlier on its fourth quarter conference call Tuesday. Uber Technologies said Wednesday on its quarterly call that mobility gross bookings were 43% lower in January. Investors still seem revved up for a ride-share recovery.

Uber shares have rallied more than 95% over the last six months, benefiting from the increase in its food delivery business amid the pandemic, but even Lyft's shares are up 82% over that period, significantly outperforming the broader market despite the lack of a similar unit. Those gains for a ride-share pure play in the face of a business that is still severely depressed don't merely imply that ride-share will return to normal as the pandemic eases, but that it will emerge better than ever.

Investors should consider some defensive driving. The big shift from car ownership to transportation-as-a-service will likely resume after the pandemic eases, but perhaps more slowly than investors believe. For one thing, people bought a fair number of new cars last year thanks to low interest rates and the need for an escape route from crowded cities. Meanwhile used vehicle sales in the U.S. rose 17% above pre-pandemic forecasts in June, according to research firm J.D. Power.

Many former Uber and Lyft users moved to places with free parking and longer drives. Fresh data from real estate giant Zillow published earlier this month shows people left some of the biggest metro areas like San Francisco and New York in droves for suburbs and Midwestern cities. Many will eventually return, but not all. Permanent work from home policies put in place by companies such as Salesforce, Twitter and Zillow Group mean some employees will have less of a need to use ride-sharing for daily commuting. They won't be traveling as much for business either, leading to a permanent decline for yet another major use case for ride-sharing.

On Lyft's conference call on Tuesday, Chief Executive Logan Green acknowledged that some pandemic changes are here to stay, including the work from home trend. But he called the notion that cities are dead "hogwash," noting that the exit of some people will make room for new, younger residents to come in. That may not necessarily be the case, though, with massive companies like Salesforce now saying they may pare down office space, including in cities like their home base of San Francisco.

The pace of recovery is likely to vary by region. Uber said on Wednesday that its mobility trends in Brazil are nearly back to pre-pandemic levels, for example. In the U.S., Lyft said on Tuesday that rides in West Coast cities have remained weak, while Texas and Florida have rebounded.

Lyft said it expected to begin to see improving comparisons beginning in the second quarter and also noted that aggressive fixed cost-cutting could lead to profits on an adjusted earnings before interest, tax, depreciation and amortization basis as early as the third quarter of this year. Uber still says it is expecting profitability on the same basis by the end of the year and noted that it should see strong growth and expanding margins in the second half of the year, assuming it hits management goals and the pandemic recedes.

Those who believe Covid-19 will be largely vanquished should consider the differences in Lyft and Uber's business models. Lyft's business stands to see unmitigated upside in that scenario, while the very factors driving a ride-share recovery could dent Uber's food delivery business, which has been so critical to its improving bottom line.

Investors in both businesses are clearly taking a ride or die approach.

Write to Laura Forman at [e-mail]

(END) Dow Jones Newswires

February 11, 2021 07:14 ET (12:14 GMT)

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