Uber vs. Lyft. Which IPO Will Drive Returns?

Uber's flying taxi prototype.

To date, LYFT investors have suffered losses of almost 35%. As many late-cycle IPOs tend to be – the LYFT IPO was important as a liquidity event for insiders, even though it has cost investors who are new on the scene. Founders and venture capitalists can only hold paper money for so long before they want to turn it into a home or jet or something. This is what I warned about two weeks prior to the Lyft IPO. Click to see that blog. So, is Uber driving along the same road?
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On the face of it, Uber would appear to be a better investment. The company’s board is made of veteran global VIPs who know how to navigate sensitive government relations – something that is critical to the future of Uber, Lyft and ride-share in general, as the business premise itself is being challenged in many countries on many fronts. One of the fundamental challenges that ride-share faces is the classification of the drivers as independent contractors. Many European countries believe that drivers are employees the minute they turn on the ride-share app. Uber argues that they are a technology company that enables individuals to make a little dough on the side. That argument lost in England (Uber is appealing to the Supreme Court), in Switzerland and has run into tax problems in The Netherlands.

At stake are mountains of expenses, including taxes, benefits and driver expense reimbursement. If drivers worldwide were classified as employees, it’s hard to imagine Uber or Lyft surviving. Since ride-share is so popular with people, it’s also hard to imagine countries wanting to kill this movement. Lyft will benefit from Uber’s ability to trail blaze through the red tape, while keeping their business model in tact. Uber’s independent chairman Dr. Ronald Sugar, the former chairman and CEO of Northrop Grumann, is no stranger to getting governments on board with his vision. To assist him, Uber has also stacked the board with other global CEOs, including Wan Ling Martello, the former CEO of Nestle AOA (Asia, Oceana and Africa) who is also an Alibaba boardmember, John Thain (former CEO of Merrill Lynch, during the makeover) and H.E. Yasir Al-Rumayyan, the manager of the sovereign wealth fund of Saudi Arabia.

By the numbers and with such a very strong executive and board team, Uber buries Lyft in potential. (Lyft has a strong board, but is still run by its co-founders.) Uber is expected to come in with a $100-$120 billion valuation. Lyft’s value has dropped to under $20 billion. Uber was profitable in 2018, with $997 million in net income, whereas Lyft lost almost a billion ($911.4 million). Uber’s 2018 revenue was $11.3 billion, compared to Lyft’s $2.2 billion. 
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However, Lyft benefitted greatly from Uber’s brand crisis in 2017, when former CEO Travis Kalanick, along with other executives and board members, were accused of basically being trogolodytes, stuck in the Stone Age with regard to their attitudes toward women. In 2018, while Uber scrambled to replace the executives under attack, including Kalanick, Lyft’s revenue more than doubled.
 
Given the negative headlines that tarnished Uber’s brand, the company posted strong growth of 43%. Uber leapt into action to turn the ethos and culture around. Uber’s board now boasts of 3 women and 5 board members of color (including CEO Dara Khosrowshahi, who is Iranian). Mr. Khosrowshahi is a very respected CEO, formerly of Expedia, who is an M&A and growth master. Perhaps the strongest indicator that the brand has recovered is that we’re still “Uber-ing it” instead of Lyft-ing or catching a cab.
 
Uber still has Kalanick and a few of his cronies on the board. However, the overall trend-line is that Uber is aimed at becoming the next blue chip – a worldwide brand with a vision and product pipeline that is transforming transportation and will be leading innovation for the next half century.

So, should you buy into the Uber IPO? At some point, you will definitely want to be an Uber shareholder. However, any IPO in the 11th year of a late-stage business cycle risks rewarding insiders at the expense of the new investors. Uber’s potential spans the stars and includes autonomous vehicles and even flying cars. However, as with any rewarding investment, it’s important to purchase your shares at a great price. Should a company with $11.3 billion in revenue carry a value of $120 billion – on par with Nvidia and Paypal? Or is the whole lot overpriced?

Alan Greenspan, Warren Buffett, Robert Shiller and multiple other economists have been warning for over a year that stocks are in a bubble. We might have grown numb to astronomical P/E ratios. However, the markets tend to humble those who ignore valuations in favor of hype.

For my money, I’ll catch a ride with Uber after the insiders cash in their shares and the pricing is more on my side.

Uber filed its S-1 yesterday and has launched its roadshow. Shares should be publicly available sometime over the next two weeks. Many, but not all, of Uber’s insiders have a 180-day lockup period.


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