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Lyft's Falling Stock Price Ahead of Uber's IPO Shows Investor Concerns About the Ride-Hailing Model Becoming Profitable

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【Summary】Ride-hailing giant Uber will list its shares tomorrow on the New York Stock Exchange in one of the most anticipated IPO’s in recent history. However, on the eve of Uber’s IPO, its chief rival Lyft is sitting on the sidelines as its stock falls to the lowest level since its own IPO in March.

Eric Walz    May 08, 2019 7:01 PM PT
Lyft's Falling Stock Price Ahead of Uber's IPO Shows Investor Concerns About the Ride-Hailing Model Becoming Profitable

Ride-hailing giant Uber will list its shares Friday on the New York Stock Exchange in one of the most anticipated IPO's in recent history. However, on the eve of Uber's IPO, its chief rival Lyft is sitting on the sidelines as its stock falls to the lowest level since its own IPO in March.

Lyft rushed to beat Uber to the public markets and began trading on March 29, becoming the first ride-hailing company to go public. However since then, Lyft watched its shares drop 33% from $78.29 on March 29 to $52.19 after today's closing bell.

The slip in Lyft's stock is partially due to investor fears about ride-hailing companies achieving profitability using the current model.

Lyft's stock has not closed higher than its IPO price since April 5.

Some analysts estimated Uber's valuation to be over $100 billion after tomorrow's IPO, now it looks as though that number will be much lower. CNBC reports that Uber is aiming to price its IPO at the midpoint of its target range or below. Uber set a price range of $44 to $50 per share in an updated filing last month.

On a fully diluted basis, that would put Uber's valuation at $80.53 billion on the low end of the range and $91.51 billion on the high end. At the midpoint of its stated range, Uber's valuation would be around $86 billion on a fully diluted basis, well short of the $120 billion some analysts believed Uber could be worth.

Uber is expected to price its shares Thursday and start trading on Friday.

Based on Uber's price target of $44 to $50 per share, a drop in the stock price as big as Lyft's could lower Uber's valuation significantly.

Ride-Hailing Drivers are Classified as Independent Contractors

While on-demand transportation has taken off worldwide, Both Lyft and Uber rely (some say too much) on "driver partners" working as independent contractors using their own vehicles. Drivers are also responsible for their own insurance, fuel and maintenance costs, which further eat into their take home pay.

Since the drivers are classified as contractors, both Uber and Lyft do not have to pay minimum wage, provide health insurance or other benefits. Uber and Lyft simply take a cut of the fare, with the rest going to the driver.

However, the amount of money going to the driver is shrinking, as Uber and Lyft are now under pressure to cut huge losses as newly listed public companies.

Lyft's Q1 earnings, its first report as a public company, reported an adjusted loss of $9.02 per share on revenue of $776 million. That translates into a $1.14 billion loss in Q1.

Ahead of its IPO, Uber released its financial information for the last two quarters of 2018. Uber lost $865 million in Q4, down from a loss of $1.07 billion in the third quarter of 2018. Uber did report significantly higher gross bookings of $14.3 billion, which is more than double that of 2017. Although its a sign of growth potential, gross bookings do not equal profits.

In addition, by treating drivers as replaceable contractors, ride-hailing companies are continuing to face public scrutiny. Lyft and Uber have been called out by drivers for not providing them a living wage.

Now Uber's early investors are set to make millions off of the work of contracted drivers, many of which cannot afford to live in major cities where they work, like San Francisco and New York.

Both Uber and Lyft Say They Cannot Afford to Classify Drivers as Employees

However, both Left and Uber said their businesses would be greatly impacted if it were to classify drivers as contractors.

Uber in its S1 filing wrote, "Our business would be adversely affected if Drivers were classified as employees instead of independent contractors."

In Lyft's S1, the ride-hailing company wrote, that if the "contractor classification of drivers that use our platform is challenged, there may be adverse business, financial, tax, legal and other consequences."

Both Uber and Lyft still a long way to go to reach profitability. Once there, the companies need the momentum to maintain it. This might mean finding some common ground and working out a solution to retain its drivers with some type of higher compensation.

This is something Uber does not seem too interested in right now, as the company concentrates on growth and will now have to please its shareholders.

Which means that investors in ride-hailing companies should be prepared for the long term to see any type of return on their investment.

Uber's stock will be listed on the NYSE beginning Friday under the ticker symbol "UBER."

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