Pick Uber Stock Over Lyft As Covid Uncertainty Lingers

We think that Uber stock (NYSE:UBER) currently is a better pick compared to Lyft stock (NASDAQ: LYFT). Lyft trades at about 8x trailing revenues, while Uber trades at a little over 7x trailing revenues. Although both the companies have been impacted by the pandemic, as the ride-sharing market collapsed through the Covid-19 lockdowns, Uber’s financial performance has been better driven by rising demand for its food delivery business. However, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating margin growth. Our dashboard Uber vs Lyft: Industry Peers; Which Stock Is A Better Bet? has more details on this. Parts of the analysis are summarized below.

1. Uber’s Recent Revenue Growth Has Been Stronger

Now, although Lyft’s average revenue growth over the last three years was stronger than Uber’s (45% vs. 14%), given the company’s smaller revenue base and its focus on the lucrative North American ride-hailing market, things changed meaningfully through the Covid-19 pandemic.

Uber’s revenues declined by about -20% to $10.5 billion over the last twelve-month period, compared to levels of around $13 billion in 2019, prior to the pandemic. The decline was primarily due to a sharp drop in the company’s core ride-hailing business which saw sales decline by over 40% in 2020, although this was partly offset by the robust performance of the delivery operations, which grew by over 2.5x over the last year. Our Uber Revenues dashboard summarizes the segment-wise breakup of the company’s revenues. Looking at Lyft, total revenue declined by about -47% over the last twelve months to about $2 billion, as the company is almost entirely dependent on ride-hailing. This compares to sales of about $3.6 billion in 2019.

2. Both Companies Are Lossmaking, But Uber’s Margins Are Improving

Both companies remain deeply unprofitable, but Uber’s margins are showing some improvement. Uber’s operating margins stood at a negative 31% over the last twelve-month period, an improvement from the negative 60% margins it posted in 2019. The improvement was driven by declining fixed costs and lower losses in the food delivery business, Uber Eats.  This compares to Lyft, which posted an operating margin of negative 88% over the last twelve-month period, a deterioration from levels of around negative 42% in 2018. The margin decline came as the reduction in the company’s cost base through the pandemic didn’t keep up with a sharp decline in revenues. We expect margins for both companies to pick up going forward. While Uber stands to benefit from strength in its food delivery business – which was previously a major source of losses – Lyft’s margins could also pick up as the ride-hailing market posts a gradual recovery.

The Net of It All

Although over half of the U.S. population is fully vaccinated against  Covid-19, with overall economic activity picking up, there remains some uncertainty in the near-to-medium term for the ride-sharing market. Covid-19 is proving more difficult to contain than initially thought due to the spread of more contagious virus variants and infections in the U.S. are surging once again. This could make people somewhat averse to ride-hailing services and more specifically to services such as ride-pooling. While this could hurt the pace of Lyft’s recovery, Uber should be better poised to cope given its exposure to the food delivery business which is likely to remain strong even in the face of potential Covid-19 restrictions and also due to its international exposure. This has been reflected in Uber’s recent performance, as its sales rose by 32% over the first half of 2021, compared to a revenue growth rate of just 6% for Lyft.

Uber’s current valuation is also slightly more attractive than Lyft’s, with the stock trading at about 7x trailing revenues, versus about 8x for Lyft.  We think this gap in valuation will narrow in the near term to favor Uber, which is more attractively priced and has better near-term prospects and possibly lower risk. As such, we believe that Uber is currently a better buying opportunity compared to Lyft stock.

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