Uber and Lyft is actually a company

Why Uber and Lyft are worth billions despite losses

New York / Vienna - Something to do with the Internet - twenty years ago this information was often enough to make huge investments for garage start-ups that had never made a cent of profit. When the dot-com bubble burst in 2000, many a dream of a disruptive cash cow also died. However, this did not completely slow the financiers' thirst for adventure, as the upcoming IPOs of the US transport service providers Uber and Lyft, which operate in the deep red, show.

Don't be afraid of speculation

At least when it went public on the New York tech stock exchange Nasdaq, Lyft narrowly overtook its larger competitor Uber: On Monday, the company with the pink logo began to ensnare potential shareholders. The first issue is expected to bring in two billion dollars. The company's management is hoping for an overall valuation of over $ 20 billion. For comparison: the rival Uber, which also wants to go public in the near future, is forecast by analysts a possible valuation of around 120 billion. The dispatchers' optimism is not based on a profitable business model, but on their enormous growth figures.

In the run-up to the IPO, Lyft was given for the first time closer insight into the books. Last year, sales exceeded the $ 2 billion mark thanks to 18.6 million active users. That was twice as much as the year before and a growth of over 500 percent compared to 2016. At the same time, the loss rose within one year from 688 to 911 million dollars. A minus that, according to the company, should increase further in view of the expansion course.

Uber had already disclosed its finances in the past few quarters. In 2018, the globally operating group made a pre-tax loss of 1.8 billion dollars on sales of a good eleven billion. Transport service providers like Uber and Lyft have one advantage: They only provide the software. They don't have to buy cars and their drivers are not employed by the company. The fact that transport service providers still make high losses is due to their aggressive pricing strategy. In order to conquer markets, Uber and Lyft are offering tariffs that do not cover costs.

Endless price war?

Uber and Lyft hope, of course, that at some point they will get enough market share to raise prices. But the free play of forces has been suspended in many countries. Uber suffered a major setback in 2016 when the company tried to oust domestic rival Didi Chuxing in China. When the government in Beijing liberalized the market for transport service providers, the government also introduced a ban on non-cost-covering fares. With market access in the second largest economy, Uber had lost its most important asset.

In other countries, too, regulators oppose price wars at the expense of consumers. Recently, Uber in Vienna was obliged to adhere to the fixed taxi tariffs. Skeptics also point to the origins of the taxi trade: before licenses were available in New York, for example, competition was notoriously fierce and margins were small. In principle, nothing stands in the way of an ongoing price war between providers with convenient apps.

All of this has not passed by investors. As is so often the case in the tech industry, hopes are placed on a revolution that is still to come: autonomous driving. Uber is also losing money because it spends a lot of money developing self-driving cars. Lyft is also driving the development of autonomous taxis through its investor Alphabet (Google). Without a driver, the profit margins of the transport service providers would skyrocket.

Because the development and acquisition of autonomous cars are immensely expensive in contrast to taxi call software, the first provider on the market has the chance to win big. Shareholders who are about to join Lyft and Uber are not relying on a fancy app, but rather on the mobility revolution. (Leopold Stefan, March 19, 2019)