Stock investors who expect to rake in big profits on the soaring shares of Uber Technologies and Lyft when they go public should think again, according to a detailed analysis by industry expert Joseph Vitale.
Deloitte’s global automotive practice leader, whose group delivers consulting, risk management, and other services to auto makers, suppliers, dealers, and car rental companies, and also advises governments, is not one of the wave of sell-side analysts waiting to market the two ride-hailing stocks.
4 Reasons to Be Cautious About Uber and Lyft
- Uber and Lyft are actually worsening the urban congestion problem.
- Ride hailing will become less convenient for consumers as congestion increases.
- Ride hailing isn’t as economically traffic-efficient as taxis.
- Ride sharing has declined among the heaviest users.
Unicorns Valued at $120B and $19B
The public debuts of America’s two leading ride-hailing rivals are among the most anticipated in 2019, as the volume of IPOs soars to its highest level since the dotcom bubble in 2000.
Uber’s estimated value is now at $120 billion, compared to Lyft, which is targeting a valuation of up to $23 billion. Lyft expects to raise $2 billion in its IPO and is offering 30.8 million shares at $62 to $68 each, according to a filing. It will list on the Nasdaq under the symbol "LYFT."
Both Uber and Lyft's forthcoming IPOs are seen as helping the transportation giants expand into new markets like autonomous cars and bike sharing. The funding is also seen as aiding the ride-hailing companies to solidify their leadership in the burgeoning mobility-as-a-service space, wherein fewer people will own cars and instead hail rides via self-driving taxis at the push of a button.
While on the surface, popular ride-hailing platforms may look like a smart way to invest in the changing mobility landscape, Vitale highlights a handful of major risks facing these soon-to-be traded stocks, per Barron’s. First, he notes that Uber and Lyft aren't solving the congestion problem that cities want to solve, instead they are actually causing it.
As urban congestion increases, Vitale suggests ride hailing will become even less convenient for consumers. This is due to the fact that ride hailing isn't as economically or traffic-efficient as taxis, argues the Deloitte market expert. With the Uber and Lyft apps, the ride-hailing driver has a period of time with no one in the car in-between rides.
“Congestion is a big deal for cities, especially with 80% of people expected to live in urban environments by 2025,” Vitale told Barron’s. “Right now, Uber has made congestion worse. It isn’t as efficient as taxis. The ride sharing driver is waiting and has to drive an empty car to come and get you. A taxi drops someone off just before you get in.”
Ride-Hailing Declines Among Heavy Users
Ultimately, ride hailing may not offer the growth that Uber and Lyft want, suggests Vitale, pointing to his firm’s data which shows ride-hailing usage has actually declined among the heaviest users.
“Usage is up for the occasional user and with more people using ride-hailing services there may be growth, but waiting for a ride while taxis pass you isn’t ideal,” he explains.
While both companies have invested heavily in their car-pooling initiatives, Vitale suggests that the hard fact is, “no one actually wants to share a ride.”
“On the subway or the bus people will pack themselves in, but no one expects to talk. In a car you feel rude not acknowledging a fellow passenger,” he noted. Lyft has pledged to make over 50% of its trips shared rides by the end of 2020. While shifting consumer preferences and the introduction of driverless car technology could change the game, Vitale isn’t sold.
He views ride-hailing as just one part of a multimodal approach to mobility as a service, alongside smart infrastructure, and light rail.
"Investors should ask the companies how they plan to tackle the problems of low asset utilization and resistance to actual sharing. Investors should also try to understand how the ride-sharing companies plan to work with local governments to help lessen congestion and help make life more convenient for commuters,” read Barron’s.
The Deloitte study indicates that while Uber and Lyft are innovative, they may face limited profit growth, potentially making them poor long-term investments. On the upside, it's important to note that these two companies have already surmounted a huge amount skepticism and prevailed.
The tech companies that debut in 2019 could face turbulence in the coming years, similar to many of the firms that had their IPO at the height of the dotcom boom. Meanwhile, as the market heads into a period of heightened volatility, investors could continue to pull out of less-certain growth plays in tech and into more defensive value stocks.