As demand for rides comes back faster than drivers do, Uber and Lyft are having to pay more to incentivize drivers. That’s one of several trends to watch as these ride-hailers prepare to report earnings.
The stock market has been doing some soul searching lately, and that’s particularly reflected in the stock prices of ride hailing companies Uber Technologies (UBER) and Lyft (LYFT).
Investors seem to still be grappling with proper valuation between and among stocks that stand to benefit from a reopening economy and those that have been doing well during lockdowns.
The ride hailing companies are in the former category, and a robust U.S. vaccine rollout seems to have investors optimistic about more people wanting to use their services. As fear of Covid subsides, governments have become more lax about social distancing measures and restaurants and bars are able to accommodate more people.
One difficulty the ride hailing companies have been facing is worry among potential customers about Covid safety. It’s kind of like the middle-seat test for airlines we’ve been talking about. Things will have pretty much gotten back to normal when people are comfortable from a contagion point of view taking a middle seat on an airplane.
It’s a similar situation for UBER and LYFT: Is a plastic shield between passenger and driver sufficient? And what about the heating and air conditioning filtration? And who sat in this seat before me—was the seat properly sanitized? Or does none of that matter because the pace toward herd immunity has rendered the risks ultra-low? The fact that demand is coming back seems to be a big vote of confidence among riders.
With the fundamental picture improving but still a bit uncertain, investors seem a bit unsure of how to price UBER and LYFT, which is the soul searching highlighted above. Both stocks have seen shares chop around a lot lately after a big surge late last year.
FIGURE 1: SURVIVING A (RIDE) HAILSTORM. Few industry segments were as hard-hit by the pandemic as ride-hailing giants Lyft (LYFT—purple line) and Uber (UBER—candlestick). But confidence has been on the comeback—first in share prices and then in passenger traffic. Meanwhile, both companies have been extending their reach beyond their core services. Data sources: NYSE, Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
Of course, people who were still willing to hail an Uber or Lyft ride during the height of the pandemic in the United States had fewer places to go with all the lockdown restrictions and increased working from home.
Now that’s changing. And it’s presenting both companies with a new problem—a shortage of drivers. As demand for rides comes back faster than drivers do, Uber and Lyft are having to pay more to incentivize drivers.
In April, UBER said it was launching a $250 million stimulus for drivers as “there are more riders requesting trips than there are drivers available to give them.” Meanwhile, LYFT is reportedly offering bonuses of up to $800 for referring former drivers back to its app.
While a shortage of drivers means the companies are at least temporarily having to spend more on driver incentives, at least it’s a sign that demand is coming back, which investors would probably welcome.
Both companies’ shares have been rising this year, with LYFT’s outperforming UBER’s. But both took a hit on April 29 after the U.S. Labor secretary told Reuters that many gig economy workers should be treated as employees.
If that ends up happening nationwide and UBER and LYFT have to treat drivers as employees instead of independent contractors, it seems that would substantially increase costs for these companies.
Such a re-assigning is far from a foregone conclusion, however. And for the moment, it seems that investors are still at least mildly bullish on UBER and LYFT.
When the companies reported last time around, both showed a shrinking annual net loss.
“While the first quarter of 2021 continues to be uncertain primarily due to COVID-19 headwinds, based on current recovery expectations, we should experience a growth inflection beginning in the second quarter that strengthens in the second half of the year,” LYFT’s chief financial officer said at the time.
Both companies have also been adjusting their mix of their operations, with UBER acquiring Cornershop and Postmates and selling ATG and Jump. It also agreed to acquire online alcohol marketplace Drizly. LYFT announced it has agreed to sell its self-driving vehicle division to a subsidiary of Toyota Motor Corp. (TM).
Meanwhile, UBER has teamed up with Marriott International (MAR), allowing U.S. members of the hotel chain’s Bonvoy travel program who link their Marriott and UBER accounts to earn points toward free night stays at thousands of hotels and home rentals around the world.
That seems like a way for UBER to try to increase customer loyalty in a competitive environment. After all, beyond UBER and LYFT, there are several other ride hailing companies around the world. And let’s also not forget that traditional cabs are still a thing.
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