Investing in Ridesharing Companies - What you need to know

The ridesharing giants might have revolutionised the way people get from A to B, but so far they have failed to reward investors by driving up their share prices.

Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) are two of the big players in the rideshare space, but it’s been a downhill ride since their highly-anticipated IPOs, with Uber and Lyfts’ share prices down 41% and 82% respectively since they floated in 2019.

To be fair, the pandemic was bad news for ridesharing services, as fewer people travelled or commuted to work over the last few years.

Uber vs. Lyft

When you look more closely, it’s easy to see why the markets have been kinder to Uber. It is much larger and more diverse than Lyft, with its market cap almost 10 times greater. While Lyft is limited to the U.S. and Canada, Uber operates in 72 countries and produces around 40% of its revenue outside of the U.S. – helping even out the impact of the pandemic as it has waxed and waned in different parts of the world.

Uber’s Q2 2022 earnings showed that consumers are still spending on ridesharing services. Revenue soared 105% year-on-year to $8.1 billion, with gross bookings for mobility (rides) up 55% partly thanks to the easing of COVID restrictions.

The disappointment for investors is that the company posted a net loss of $2.6 billion, mainly due to some poor investments. On its Q2 earnings call, CEO Dara Khosrowshahi predicted Uber would “continue to benefit from a secular increase in the on-demand transportation of people and things, as well as a shift back from retail spend to services spend.”

The transportation of “things” is the key here, as people spend more time at home and order-in via UberEats – which is potentially cheaper than eating out and safer than sitting in a crowded restaurant. This well-timed diversification has also helped offset the impact of the pandemic.

Meanwhile, Lyft reported its best-ever earnings, with revenue surging 30% from a year earlier. It also reported a gain in active riders to reach 19.9 million, its highest number since the pandemic began. Even so, with similar fortunes to Uber, Lyft reported a net loss of $377 million.

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Should you invest in ridesharing companies?

Ridesharing companies have been able to manage inflationary pressures, which is clear from Uber and Lyfts’ Q2 results, but this alone doesn’t make their stocks a wise investment. The key, for now, is to keep attracting new drivers, which has been a struggle given their poor reputations over driver pay and treatment.

The ongoing regulatory debate around the globe on the gig economy and as to whether drivers are employees or contractors also hangs as a cloud over the industry. This could drive up wages and squeeze operating margins, which won’t be attractive to investors.

If we look ahead, the economics of ridesharing will start to change over the next few years as the big players begin to take advantage of autonomous vehicles.

Related article: How to invest in Tesla in Australia

The future of ridesharing companies

The Society of Automotive Engineers sets out five levels of autonomous driving. SAE Level 1 is “Driver Assistance” such as cruise control. Level 2 “Partial” autonomy can take over steering, acceleration and braking in specific scenarios.

Level 3 “Conditional” autonomy is a major leap forward that uses artificial intelligence and driver assistance to take full control. It does not require direct human supervision, although a person must still be ready to take control of the vehicle at any time.

Level 4 vehicles – intended for driverless taxis and public transport – will be programmed to travel between fixed points, or restricted by geofencing to drive within specific areas. Even then, these vehicles may struggle in severe weather. Level 5 “Full” autonomy remains the Holy Grail (and is likely still many years away) which will allow vehicles to drive anywhere, in any conditions, without any human interaction apart from specifying a destination.

China, Germany and certain areas of the U.S. are the first to approve Level 4 vehicles on the road, paving the way for ridesharing services to make the most of the technology.

Uber and Lyft are amongst those that have trialled autonomous vehicles, but it hasn’t been an easy road. In 2020, Uber sold off its driverless car subsidiary to start-up Aurora Technologies, backed by firms including Hyundai and Amazon. In 2021, Lyft sold its self-driving car unit to a subsidiary of Toyota.

Level 4 autonomy has the potential to completely reshape the economics of the sector, but it still remains to be seen exactly when the dream of driverless cars will become a reality for the ridesharing industry – a trend investors committed for the long term should watch.

Cover image source: Rocketclips, Inc./Shutterstock.com