Pair Trading Opportunities in Ride-Sharing: Uber vs. Lyft

Uber and Lyft are two competing companies with a strong presence in the passenger and goods transportation market. Uber operates in several countries around the world – the USA, Europe, South Africa, Asia, Australia – while Lyft operates only in the USA and, more recently, in the neighbouring country of Canada. 

When analysing these two companies, it is essential to consider their market capitalisation, profitability, revenue growth over several quarters, debt, and the overall market positioning.

Uber has a market capitalisation 20 times greater than its rival Lyft – $140 billion compared to $7 billion. Additionally, it is notable that only recently Lyft reported positive operating results, whereas Uber has been posting positive operating results since 2022.

These results demonstrate the viability of the business model for both companies, although there are some distinct differences between them, such as goods transportation – a market explored only by Uber, which accounts for 17% of its revenue.

On the other hand, UBER has significantly higher Debt to Equity ratio when compared to LYFT which has a negative net debt position.

While Lyft has a negative net debt position the Equity to Total Assets ratio stands around ~10x while Uber stands at roughly ~4x.

A “HELL” of a rival

Both companies have experienced controversy in recent years over mistreatment and abuse by riders on the platform.

Some unethical business practices stand out:

• In 2017 UBER was accused of spying and tracking its rival LYFT, through software - called HELL - developed specifically to track how many drivers the competitor platform had available for trips and what prices were being charged. With this information it was possible to offer better incentives to these drivers in order to entice them to use Uber instead. Thus, increasing the number of riders available and consequently the number of trips, taking away market share from rival LYFT;
• That same year, US President Donald Trump signed an executive order banning travelers and refugees from predominantly Muslim countries. This order sparked a wave of nationwide protests, most notably at JFK airport. Following the announcement by the New York Taxi Workers Alliance to freeze cab rides for an hour in support of the protesters, UBER offered cheaper rides in and out of the airport. This announcement caught the attention media and created quite a stir on all social networks, including a movement - “DELETE UBER” - in protest. This movement led to a several user account being deleted

From a strategic standpoint, the leading company, with a market cap twenty times larger, must focus not only on growth but also on maintaining market share. This situation positions LYFT advantageously. As higher interest rates drive out more leveraged and financially unsustainable competitors, Uber must concentrate on staying ahead. Any misstep by DoorDash or Uber presents an opportunity for Lyft to capitalize on their mistakes.

Macroeconomic Outlook and Structural Threats

In a market where the expression “cash is trash” no longer makes sense - due to the rapid rise in the level of interest rates - poorly capitalized companies with negative operating margins and large amount of debt are beginning to disappear from the market and reduce the pressure that once existed on well-established companies. These can now begin to increse their operating margins due to less competition and reduce their customer acquisition cost.

However, other concerns are emerging, such as a strong dollar that jeopardizes the operating margins of companies that operate overseas. In this case, UBER is exposed to this risk as substantial part os its revenue comes from countries belonging to EMEA and LATAM. It is estimated that this effect will have a negative impact of 3% on his annualized revenue growth.

New technologies, such as autonomous driving, and the possibility of new competitors emerging is seen as a potential risk for these two companies, an effect that is mitigated through a Pair Trading Strategy.

It could be a potential factor for starting new partnerships - where both companies have a functioning ecosystem, based on a stable customer base and developed matching and routing technology, without having to resort to massive R&D investments.

Media and Advertising - A game changer

As with other companies with huge database assets, UBER and LYFT are increasingly focusing on this niche.

In order to increase their profitability and keep their users happy and active on their platforms, it is crucial to target them at key moments during their journey or while they are browsing the platform. To do this, it’s essential to invest and train models that promote the right products for each user based on their digital footprint - what they buy and where they go.

This part of the business for both companies has grown significantly in recent years, as seen in the image below. What’s more, margins in this industry are estimated to be 40 percentage points higher than in their core business - Ride-Sharing.

There is no doubt that marketplaces such as AMZN LYFT & UBER will continue to see their advertisement revenue continue to go up.

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Disclaimer: The information provided in this article is for informational purposes only and should not be considered as financial advice. The analysis and opinions expressed are based on current market conditions and publicly available information at the time of writing. Investing in the stock market involves risk, including the potential loss of principal. Readers should conduct their own research or consult with a qualified financial advisor before making any investment decisions.

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