Uber and Lyft seem locked in a never-ending battle. The fact that both are missing a clear path to profitability is of little concern to investors, who continue to believe in the potential of the rideshare economy and continue to pour money into these two companies.
It’s hard to deny that both companies have shown attractive growth over the past few years. Uber’s annual revenue in 2019 was $14.1 billion, 25% more than in 2018. Lyft is smaller, but growing faster, with $3.6 billion in annual revenue and a growth rate of 67%.
However, in this “new economy”, it seems like the larger the revenue, the larger the losses. Uber recorded a loss of $8.5 billion in 2019. Lyft lost “only” $2.6 billion. Growth first, profitability, hopefully, later. Got it. Do not question the gurus of Wall Street.
This is equivalent to putting a big sign in Times Square that says: “Download my app, pay me $50 through it, get $100 back”. How many downloads would this app get in a day? A few tens of thousands, at the very least. A very conservative estimate of 50,000 downloads a day would net us $2.5 million on our first day. Once the word gets out, we’d top a billion dollars in revenue in no time. The revenue chart for our app would wow every analyst.
We’d probably be able to get a multi-million dollar valuation on our app. We’d be the top-grossing app for Android and iPhone.
If we’d ever be asked about the bottom line, we’d say – don’t worry about it, we’ll find a way to monetize the user base. So what if we’re losing $50 on each sign-up. Maybe we’ll charge more, say, $75 to get $100 back. At least our losses would narrow, and it would look like we’re headed towards profitability. Our stock options would be the hottest thing since JLo’s and Shakira’s performance at the Super Bowl.
Back to Uber and Lyft. Is there an economy of scale benefit at play with Uber and Lyft? Will they become profitable after reaching a certain revenue threshold? The answer, so far, is a resounding no. At the core of both businesses are human drivers, who need a living wage to feed their families. Humans do not scale; just because you hire thousands of drivers doesn’t mean you get to pay each subsequent driver less money. Human labor is an expensive resource. More humans equal more money in wages. Always.
The only case in which Uber and Lyft can thrive is when you take humans out of the equation. No wages, no unions, no courts, no problems. A human-less business is one where sufficient capital expenditure can solve any problem. Just pay a big lump sum upfront to finance the robots, and that’s it – they’re yours to keep. No additional monthly costs. It’s not that this concept hasn’t been tried with humans before. We just collectively decided that maybe, just maybe, slavery was a bad idea.
Robot slavery, on the other hand, should be fine. At least until they develop consciousness, but we’re getting sidetracked.
Therefore, the real question for Uber and Lyft is “how close are we to driverless cars?”, or maybe more specifically, “can investors money fuel Uber and Lyft until we get there?”
The world is torn on driverless cars. Some are promising that we’ll get there next year, others struggle to see how our infrastructure can handle driverless and human drivers at the same time. Not to mention the unknown unknowns – things we don’t even know we don’t know about driverless cars. The type of things that will become evident only after we’ve created them at a scale. Maybe then we’ll find out that the entire idea was dumb. Maybe we won’t. The point is that this utopian driverless world is still quite shrouded in mystery.
Uber and Lyft cannot profitably scale or improve margins while remaining human-centric, and they will remain so for an unspecified amount of time. Investing shouldn’t be about belief and faith, yet here we are, believing in present-day sci-fi business stories. Would driverless cars be awesome? Yes. Is this question relevant? Absolutely not.
Investors have brought these companies to where they are today – who’s to say they won’t support them all the way through driverless cars? They might. But a pair of businesses losing a combined $10 billion a year, valued at a combined $80 billion, that need to get rid of all of their humans to turn the business around? Good luck with that.
