Why invest in unprofitable ridehailing companies?
Last week, Lyft filed its IPO, the first ridehailing company to enter the stock market. Yet, ridehailing companies are known to operate at a loss, which makes you think twice before buying their shares. Or does it?
Losses by the numbers
Even though, Lyft’s revenue was about $2.16 billion for 2018, it closed the year with $911 million losses. The total revenue increased by 103% since 2017, and by 528% since 2016, but the losses also increased. While Lyft lost about $682 million in 2016, the amount increased to $688 million in 2017, and to $911 million in 2018. Yet, the company was valued at $15 billion last year, before filing its IPO.
The other ridehailing giant, Uber, also operates at a loss. In 2018 the company lost $1.8 billion, but they lost slightly less than the $2.2 billion in 2017.
The right formula to balance the price riders want to pay for a ride and the price needed to operate at a profit is hard to find. What's more, ridehailing companies are investing heavily in R&D, looking at future mobility forms such as autonomous technology which does not pay off (yet).
So, why would one invest in Lyft or Uber if both companies are operating at big losses, year after year? One theory is the potential growth, both ridehailing companies emphasise their growth and the future potential of the company. For instance, Lyft may have increasing losses but it claims to have increased ridership and coverage as well. For instance, last year the company had 30.7 million riders and 1.9 million drivers more than the year before.
Additionally, both companies are expanding their services becoming Mobility-as-a-Service companies rather than merely ridehailing companies. However, neither their bike or scooter services deliver significant revenues, nor do they reduce the losses. Additionally, ridehailing companies are heavily investing in driverless technology, creating another potential value for the future.
Waiting for AV
Since the main cost for ridehailing companies is the salary of their drivers – the car-related costs are borne by the drivers – driverless cars might be the key to become economically successful. Uber and ride hailers as well, for instance, is known for its extensive research to autonomous cars.
Some speculate that once autonomous cars are the new reality, ridehailing companies will be out of the red. However, there might be one side remark to make: if human drivers no longer finance the cost of the vehicles, who will?
Investment of carmakers
Yet, if ridehailing companies are really economically unsustainable in the long term, it is remarkable that many carmakers are investing in ridehailing companies anyway. Lyft received $500 million from GM in 2016, while Uber received $500 million from Toyota in 2018.
And it goes further than the big ridehailing companies. Ford invested $65 million in the shared shuttle startup Chariot three years ago, but recently had to shut it down. Moreover, according to Bloomberg New Energy Finance (BNEF), Ford’s investment in Chariot is part of a broader trend of carmakers investing in non-car making sectors. In 2018, shared mobility startups received $5 billion of private investment, which is 71% more than 2017.
GM for instance, invested in its driverless car subsidiary, Cruise, and the forthcoming ridehailing service built by Cruise will receive no less than $1 billion a year from GM, and some more billions from other investors, remarks BNEF.
Not sustainable or not existing
So, why are they all investing in ridehailing technologies and companies if the existing big ridehailers cannot even make profit? For instance, Daimler AG and BMW AG recently joined forces for their carsharing departments, respectively Car2Go and DriveNow, because both were making losses. While Ford’s Chariot shut down because it could not find its proper position in the market – between public transportation and ridehailing.
Nevertheless, the effort is not as futile as it seems. Carmakers can use the data to continue the story of new mobility services. Ford, for instance, said to BNEF that its goal is to use data it collected from Chariot to move forward with its other mobility ventures.
As such, even investing in an economically losing company, can mean winning in the long term. It might be a guess for the data, or it might be a guess for an entirely new mobility concept, however it might be clear that traditional carmakers are investing in new mobility companies. What might not be clear for all – including the big ridehailers – is how to make money out of it, since profitable business models for this new business do not exist yet.
A (calculated) guess?
In the end, there might be various reasons why carmakers still invest in ridehailing companies that operate at losses:
- The assumption that they will become profitable in the long-term,
- The assumption that they will become profitable once they are driverless,
- As an innovation strategy to invest in new mobility modes, and/or to obtain data to re-invent theirselves in the changing mobility market,
- As an innovation strategy aimed at driverless technologies ridehailing companies are developing,
- As a financial investment.
In the latter case, if the ridehailing companies keep operating at losses, the carmaker-investors might decide to pull the plug, let the ridehailing company collapse, and fill in the (mobility) gap with their own services, or even go back to their roots: selling cars.
Image: Ford CEO Mark Fields introduces Chariot as the future of mass transit at the North American International Auto Show in January 2017.