Wall Street is worried Uber's core rides segment could stop growing next year - but an analysis of 2.4 million rides shows profitability could happen far sooner than expected
- Uber and Lyft both expect to reach profitability in 2021, and are under massive pressure to do so following underwhelming public offerings this year.
- Data scientists at Barclays studied data from 2.4 million rides to determine how much elasticity the companies have to raise prices - which is widely seen as a necessary step for the industry.
- The team concluded that both Uber and Lyft could reach profitability as soon as next year with modest price hikes, which aren't likely to hurt demand.
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Uber's under massive pressure to turn a profit, and new data shows that could be attainable sooner than later.
Data scientists at Barclays crunched the numbers on 2.4 million taxi and ride-hailing rides in New York City, the country's largest and most important market, and found that customers might be more receptive to a price hike than expected.
That's welcome news for both Uber and Lyft, which desperately need to raise prices at some point after using heavy discounts and coupons to grow and gain market share on one another.
"Our estimate of elasticity suggests Uber and Lyft can price to achieve positive operating profit with only a modest impact on volumes, disproving a key piece of the bear case," a group of analysts from the bank's macros strategy, data science, and equity research teams, said in a note to clients Tuesday.
Uber and Lyft only need to raise prices by a "modest" five to eight percent in 2020 to get to EBITDA profitability. That's a full year before the company told investors it expects to get there.
"Our current target with a ton of hard work from all of our teams is to get to total company EBITDA profitability for the full year 2021," Dara Khosrowshahi, Uber's chief executive, told investors in November, "as we see the benefits of global scale and efficiency and the best tech talent out there."
Similarly, Lyft told investors on its third quarter earnings call that it expects EBITDA profitability in the last quarter of 2021.
Slowing rides growth
Barclays says Uber is likely to see its rides business stagnate for the first time in its 10 years, especially if shared rides don't get the same discounts they've been receiving.
"This, combined with the elasticity noted above, could mean upside to gross bookings (GBs), revenue, and EBITDA - and significant upside for whichever metric UBER decides to flex the most," the analysts said.
Of course, if price increases lead to a decrease in volumes, it could have an adverse affect. Here's how the bank's modeling the potential impacts:
New regulations could be a problem
New regulations, like those in New York that have already impacted Uber's ability to sign up new drivers, and limits how much drivers can cruise with empty vehicles, could post a big risk, Barclays says, "but not an existential one."
"While rides are likely to decrease in response to higher fees, we do not believe the magnitude of the fees enacted or under consideration is sufficient to alter the growth trajectory of ride-hailing companies," the analysts said.
And bans like London's revoking of Uber's license earlier in December aren't likely to be repeated either: "We think this risk is almost non-existent in practice for the industry," they said.
All things considered, the closer the companies get to profitability, the longer of a leash they have to keep investing in new products as well as sales and marketing.
"While they might not choose to do so, because in management's view their long-term strategy is better served by investing for growth," Barclays said, "they appear to have the flexibility to do it if they want. "
