Uber Technologies Inc. (UBER, Financial) and Lyft Inc. (LYFT, Financial) are textbook cases of good companies that make bad investments.
They are good companies because they offer great services to consumers. Their apps and network of drivers make riding around cities easy and efficient.
They are bad investments because they cannot deliver superior returns on Wall Street. Returns that beat major market averages, that is.
Since they went public, the two companies have reported a stream of losses, including the one Uber delivered on Thursday.
Uber and Lyft are young companies. Therefore, Wall Street should focus on revenue growth, not earnings.
Over the last three years, Uber's revenue has grown 65.10% while Lyft's revenues grew at a rate of 122.5%.
Meanwhile, earnings before interest, taxes, depreciation and amortization has moved the other direction, with both companies running at negative operating incomes.
| Company | Uber | Lyft |
| 3-year Revenue Growth (%) | 65.10 | 122.5 |
| 3-year EBITDA Growth (%) | -52.7 | -57.7 |
| Current Operating Income Growth (%) | -32.2 | -54.3 |
Source: GuruFocus as of Nov. 6.
Still, the divergence between earnings growth and revenue is more a matter of the two companies' failure to monetize their business models rather than a matter of their age.
Uber and Lyft earn returns that do not match up to their cost of capital. This means they will destroy value as they grow.
| Company | ROIC | WACC | ROIC-WACC |
| Uber | -23.3% | 0.00% | -23.3% |
| Lyft | -47.39% | 0.00% | -47.39% |
Source: Compiled from GuruFocus on November 6, 2020
Economists have a good explanation for the failure of the two companies' management to monetize their business model: price competition.
While the market for the two rideshare apps could work as a duopoly, in theory, they work as perfect competition in practice.
That's a market where consumers have perfect information on the quality and the price of services, pitting one seller against another—Uber against Lyft in this case.
The companies have no pricing power, earning a "normal" profit in the long run.
Investors should look elsewhere on Wall Street for better returns.
Disclosure: I have no positions in Uber or Lyft.
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