Lyft is floundering as Uber thrives. The difference? It’s all about scale

Lyft and Uber are going in different directions in terms of revenues, as Uber’s food business and its much larger size allow it to deal with the difficult operating environment much more effectively.

Lyft Q1 2022 revenues / EPS were $875.6 million / LOSS$0.57 compared to forecasts of $851 million / LOSS$0.55, but it was the outlook for profitability that really shook confidence in the company.

Here the company plans to spend more money on driver incentives in order to attract them to the platform meaning that profitability will take a hit. Q2 2022 EBITDA will now be $10 million – $20 million way below forecasts of $88 million, which is what triggered the 30% collapse seen in the share price on Wednesday.

On the other hand, Uber fared much better with Q1 2022 revenues / adj-EBITDA of $6.9 billion / $168 million ahead of estimates of $6.1 billion / $135 million. Uber went on to forecast bookings and adj-EBITDA for Q2 which was ahead of expectations.

These results are a clear demonstration of how important scale is in network-based businesses.

RFM’s rule of thumb states that a network-based business needs around 60% market share, or to be twice the size of its nearest competitor, in order to make money. This is because when one reaches this level of scale, one becomes the go-to marketplace to effect a transaction.

This tends to mean that one can charge a little bit more to both buyers and sellers than competitors can, which becomes the source of profits and cash flow. This is why Lyft has to add driver incentives in a tight labour market and Uber doesn’t.

This is further exacerbated by Uber offering both food delivery and freight, because it means that the opportunity for drivers to be engaged while they are working for Uber is better than it is for Lyft. Hence, without incentives, a driver will make more money per hour working for Uber than he or she will working for Lyft.

This puts Lyft in a very difficult situation and adds weight to the argument that when it comes to valuation, one should pay more for Uber than one should for Lyft. This is what was priced in on Wednesday, as Lyft is now trading on 1.4x 2022 EV / Sales while Uber remains on 2.1x.

That said, given that the outlook that both companies face remains difficult from the point of view of generating profits for investors, I continue to be pretty ambivalent about this sector. If one had to have one over the other, it would be Uber, given its much stronger position.