Can Uber and Lyft be profitable?

Can Uber and Lyft be profitable?

Uber’s Rollercoaster Ride: Breaking Even but Still a Long Way to Go

The story of Uber, the world’s largest ride-hailing company, has been nothing short of a rollercoaster ride for its investors since its listing in 2019. Initially, doubts swirled over whether the perennial lossmaker would ever turn a profit, causing its share price to plunge by a quarter in the first six months. The stock price then seesawed, soaring during the pandemic-era tech stock craze, only to dive back down as rising interest rates dampened investors’ enthusiasm for businesses reliant on cheap funding.

However, since hitting a low point in July last year, Uber has shown signs of greater financial discipline, leading to a recovery in its share price. Costs have been reduced, and fares have increased, leading to improved financial performance. This month, the company reported an operating profit of $326 million for the second quarter of the year, marking its first time in the black. Meanwhile, its domestic arch-rival, Lyft, continues to struggle, reporting another operating loss of $159 million. Lyft’s market value remains in the doldrums, down 85% from its initial public offering in 2019, six weeks prior to Uber’s debut.

Breaking even, however, is just the first step for Uber. Despite the recent profit, the company has accumulated $31 billion in net losses since disclosing its first results in 2014. Investors have now put in $21 billion of capital into the firm. Annualizing Uber’s most recent quarterly operating profit implies a return on capital of around 5% after tax. This return falls below the company’s current cost of capital, suggesting that investors’ money may be better deployed elsewhere.

The hope, of course, is that Uber’s profits will now soar to new heights. But it’s important to note that over 60% of the firm’s revenue growth in the past five years has come from businesses other than ride-hailing, with food delivery being the most significant contributor. The pandemic fueled a surge in food delivery, but Uber’s profit margin in this segment is less than half of what it earns from ride-hailing operations.

Uber promises that its food delivery business will become more lucrative as it matures. However, its main competitor, DoorDash, which generates nearly three times the food delivery sales in America, only has marginally better profit margins. In the freight business, Uber is currently losing money as it struggles to secure a foothold in a crowded industry in the midst of a downturn.

Another concern for Uber is its push for international expansion, as growth in its home market of America slows down. While the company does not provide detailed profit breakdowns by geography, it is likely that its margins are highest in America, where it captures almost three-quarters of the ride-hailing market. In other regions, Uber faces fierce competition from local rivals, such as Bolt and FREENOW in Europe, Gojek and Grab in Southeast Asia, and Ola in India. This intense competition will keep a tight lid on margins.

Investors initially bet on Uber’s dominance in the ride-hailing market, believing it to be a winner-takes-all business. This justification led to the burning of billions of dollars in a race for market share, a race Uber seems to be winning, especially at home. Nevertheless, the question remains whether this market dominance will transform Uber into the colossal cash machine that investors had hoped for. Only time will tell.

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