Lyft has completed its Initial Public Offering, and at this writing the price has since fallen 35%. Uber’s IPO is expected soon. Both will now be publicly traded companies, reliant on many people’s judgments about whether they can be good investments. Uber loses billions of US dollars every year, while Lyft, which is smaller but growing faster, is getting close to losing $1 billon/year for the first time.
Why invest in these companies?
Anyone who says “Amazon lost money too at first” is just not thinking about transportation. Amazon can grow more profitable as they grow larger, because they can do things more efficiently at the larger scale.
Uber and Lyft are not like this, because their dominant cost, the driver’s time, is entirely unrelated to the company’s size. For every customer hour there must be a driver hour. Prior to automation, this means that no matter how big these companies get, there is no reason to expect improvement on their bottom line. Any Uber or Lyft driver will tell you that these companies have cut compensation to the bone, and that they already require drivers to pay costs that most other companies would pay themselves, like fuel and maintenance.
If Uber and Lyft could rapidly grow their shared ride products, where your driver picks up other customers while driving you where you’re going, that could change the math. But shared ride services don’t seem to be taking off. My Lyft app rarely offers me the option, even when I’m at a huge destination like an airport, and when they do it isn’t much of a savings, which suggests that it’s not really scaling for them.
Of course Uber and Lyft could also go into another business, such as bike and scooter rental, but in doing that they’re entering an already crowded market with no particular advantage apart from capital. The single-customer ride-hailing is the essence of why these companies exist, and there’s no point in investing in them unless you think that product can succeed.
Please correct me if I’m wrong, but it seems to me the possible universe of reasons someone would invest in these companies is the following:
- Confusion about the basic math of ridehailing, outlined above. Hand-waving comparisons to Amazon are a good sign that this mistake is being made.
- Extreme optimism about Level 5 automation, which would indeed transform the math by eliminating drivers. I no longer hear many people saying that commercial rollout of Level 5, in all situations and weathers, is imminent, as many people believed around the time Uber and Lyft were founded. (And no, it makes no sense to have a huge crew of drivers ready to take the wheel only when the weather looks bad. Nobody can live on that kind of erratic compensation.)
- A naive belief that if you love a product, or find it essential to your own life, it must therefore be a good investment (a rookie investing mistake).
- A belief that while you don’t believe any of those three things, enough other people do that those people will drive the price up, and you can get out before they discover the truth. If this goal were intended clearly and honestly, it would be Ponzi scheme. So surely it can’t be that.
So I must be missing something. What am I missing?