Uber’s Telling Lock-up Expiration: Ridesharing May Favor The Underdog

Uber’s (UBER) share lock-up just hit its expiration date, and early investors are more than happy to liquidate their piece of the pie. This is following an ostensibly disappointing earnings report on Monday that sent these shares tumbling to their lowest level since the company went public.

Today there are more sellers than buyers in UBER’s market, and the stock has plunged another 4%. The stock is now down over 35% since its close on the first day of trading.

Lyft’s (LYFT) investor losses still exceed UBER’s, at a 45% decline from its first close as a public company. Uber is quickly closing in on those losses.

Lock-Up Expiration                                              

A lock-up period is meant to keep a stock price from plummeting in the first days of trading. It prevents private investors from dumping their shares for 90-180 days (general 6 months after IPO). What it does is set a hair-trigger sell-off for the lock-up expiration date.

The expiration day slide is typically around 1-3%, according to Market Beat, and shouldn’t affect long term investors’ strategies though a larger sell-off could be a signal that this position may be toxic.

Early investors rushing to rid themselves of UBER shares isn’t a great sign for the company, especially considering the substantial losses the company has incurred over the past 3 months. 

Uber’s (Recent) Story

Uber has been in free fall since its disappointing Q2 earnings in early August. The company reported an over $5 billion quarterly loss, over 6 times that of a year earlier and over five times the prior quarter’s loss. Uber’s topline only grew by 14% year-over-year in Q2, which was below expectations and lowered consumer sentiment for the stock.

In this most recent report (Q3), Uber demonstrated a top and bottom-line beat, but investors were still not satisfied. Uber missed on key metrics such as monthly active users and total bookings, which are crucial for this growing ridesharing company.

Ridesharing Duopoly

Uber and Lyft are in a competitive duopoly where predatory pricing is used to secure customers. I can attest to this here in Chicago where most people I know check both Uber and Lyft for the best pricing before deciding on which service to use. This is causing these firms to undercut each other into losses.

Uber has a much more diversified portfolio of services, which you would think would give them a competitive edge over Lyft, but I am starting to think it’s going to be the companies downfall. Uber’s other bets, such as Uber Eats and Uber Freight, are both competing in increasingly competitive spaces. These segments are driving down margins as these lose an increasing amount.

Uber is still liquid enough to have no concern about bankruptcy quite yet, but its lack of a profitability timeline worries me. Cash is being hemorrhaged from Uber at an increasing rate, and I don’t think they have as many years as they believe in figuring out how they are going to turn a profit.

Lyft’s (nearly) pure-play ridesharing strategy is looking like a competitive edge as its losses continue to narrow every quarter. Over the past month, LYFT is rose over 8% as this ridesharing company looks increasingly attractive at its substantially lowered valuation.

Lyft says it will have a profitable EBITDA by full-year 2021.

Lyft continues to take market share from Uber, as you can see in the data analytics company, Second Measure’s, graph below.

Take Away

Ridesharing is something brand new to the public markets, and its lack of profitability is scary to investors. Despite Uber having substantially more money to burn, its lack of a profitability timeline concerns investors. Lyft’s recent announcement of EBITDA profitability by 2021 is a positive sign for the company.

Both of these ridesharing stocks appear to be falling knives, but LYFT is looking increasingly attractive as it slides.

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