Lyft Inc. (LYFT, Financial) is the second-largest ride-sharing service provider in the U.S. and Canada. In addition to connecting riders and drivers with the use of its app, the company has entered the bike and scooter-share market to offer a variety of transportation options to its users.
There is a good chance a price war could break out between Lyft and Uber Technologies Inc. (UBER), which poses a major risk as the company reported mixed second-quarter 2023 earnings that highlighted a bumpy road toward profitability.
Factors contributing to a potential price war
What makes a price war between Uber and Lyft likely?
First, Lyft’s new CEO, David Risher, has lowered ride fares, focusing on aggressive cost-cutting efforts to strengthen the company's growth in the North American rideshare market.
Second, executives from both companies have hinted at it. In an interview, Risher said, “We really want to price competitively." Similarly, Uber CEO Dara Khosrowshahi has said that Lyft has “taken some tough actions, and they are competitive in pricing now." He added, “Generally, our pricing is quite comparable to Lyft and that has resulted in, I'd say, a constructive competitive marketplace."
Benefits and risks
A price war occurs when businesses in the same industry aggressively lower their prices to attract customers and gain a larger market share. While price wars might seem beneficial at first, they can have both advantages and disadvantages for the businesses involved.
How can Lyft's operations be affected by lowering prices to attract more customers? It can increase its market share, gain customers, put pressure on competitors and obtain a temporary advantage. In theory, this should increase revenue growth for Lyft for some time. In May, for instance, the company reported that price cuts led to adding 10% more riders to its platform in the first three months of the year.
However, I see mostly more risks than benefits for Lyft should it decide to lower its prices. Why? Because Uber dominates the U.S. rideshare market. Data from Bloomberg Second Measure confirmed that in July 2023, Uber had 74% of rideshare market sales while Lyft only had 26%.
Lower prices for Lyft will also put pressure on its profit margins, which would not be ideal since it is already struggling to become profitable. Uber posted its first-ever operating profit in its latest earnings report, while Lyft reported a loss from operations.
Another negative factor is that lower prices may translate into lower profits for its drivers, as they are considered independent contractors and not employees. While lower prices may work in favor of higher sales for Lyft, at the same time, taking inflation into consideration, its drivers may not find at the end of the day that they make as much profit as they would like due to business expenses like fuel costs.
A focus solely on price can undermine the value proposition of a business, making it difficult to differentiate from competitors based on other attributes. Once Lyft enters a price war, it can be challenging to exit without losing face, as customers may come to expect and demand lower prices. This could be detrimental for a business that defines its optimal pricing strategy to maximize its profitability and not its customers.
In conclusion, while a price war might offer short-term benefits in terms of increased sales and market share, it can have significant drawbacks that impact a Lyft's profitability, brand image and long-term growth potential.
Financial outlook
Turning to Lyft's finanicals, one main warning sign is that revenue per share has been in decline over the past three years. However, its second-quarter revenue of $1.02 billion was in line with analysts' projections.
The company also recorded a net loss of $114.3 million, which improved from a loss of $187.6 million in the first quarter and a loss of $377.2 million in the prior-year quarter. Further, the GAAP loss of 30 cents per share topped expectations by 16 cents.
Looking ahead, Lyft revised its revenue forecast for the third quarter to between $1.13 billion and $1.15 billion. This is above Refinitiv's estimates of $1.09 billion. Despite the positive guidance, I see a problem as it is also anticipating ride-share volume growth of 20%.
For the three months that ended June 30, the revenue per active rider was $47.51, lower than the amount of $49.89 for the same period a year ago. If this trend does not reverse, then Lyft will have a big problem as it will earn less with more business operations. This is not helpful for profitability over the long term.
The company also has a low profitability rank of 3 out of 10 as well as a weak rank for financial strength at 4 out of 10. Further, I find the three-year revenue growth rate of -10.1% to be highly problematic.
Final thoughts
Lyft plans to become profitable by the end of 2023, which is a big challenge. While the has been some progress, much more needs to be done.
As such, I would wait for the next few quarters to see if Lyft can improve its financial performance. It will be nice to see not just revenue growth, but also improvements in the net and operating margins and for the company to generate positive free cash flow.
Regardless, it may be more prudent to stay on the sidelines for the time being.
