Uber and Lyft Stock Plunges Show Market Wants Profits Over Growth

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Uber and Lyft face headwinds from driver supply and increasing gas prices.

Timothy A. Clary/AFP via Getty Images

We’re not in Kansas anymore.

Shares of Uber Technologies (ticker: UBER ) and Lyft ( LYFT ) are tumbling after the ride-hailing companies both posted better-than-expected financial results.

On Wednesday, Uber  reported revenue growth of 136% year over year for the March quarter and adjusted earnings before interest, taxes, depreciation, and amortization ahead of estimates. Last evening, Lyft also generated strong sales growth of 44% for the first quarter and beat the EBITDA consensus.

Following the earnings releases, Uber shares fell as much as 11%, while Lyft dropped 34% in early trading.

The initial reactions are more evidence that the old ways of growth at all costs without strong profitability don’t work in this market. While growth was strong, both Uber and Lyft are still losing on a net income basis.

Lyft shares were punished even more because management gave a forecast range for second-quarter adjusted EBITDA way below Wall Street consensus. Uber, at least, provided EBITDA guidance slightly above analysts’ estimates. But the absolute EBITDA numbers are still minuscule relative to the ride-hailing companies’ market values of $51 billion for Uber and $7 billion for Lyft.

Some of the biggest names in technology have been cautioning companies and investors about the shift in the market environment for valuations. Last weekend, Amazon founder Jeff Bezos warned when the “bull run” in technology ends, “the lessons can be painful.” Bezos’s comment came in response to Bill Gurley, a longtime venture capitalist who said technology valuations have moved on to more conservative measures based on profits—not the crude revenue multiples of prior years.

Another big problem for the two companies is the Federal Reserve is implementing a more hawkish monetary policy to combat inflation, which means interest rates will continue to rise. Technology stocks are especially sensitive because higher rates lower the value of future earnings. This has a larger impact on growth stocks because most of their value comes from profit streams that are further out.

When asked for comment, an Uber spokesperson pointed to CEO Dara Khosrowshahi’s prepared remarks where he said they were aware of the market’s focus on profit growth and they are confident their company can deliver “significant profitability” in the future.

It isn’t going to be easy to meet the market’s new demands. Uber and Lyft are facing headwinds from managing driver supply in an increasingly competitive environment for gig workers to rising gas prices. Perhaps, they will need to raise prices to generate better earnings.

But one thing is for sure, the current course of action isn’t tenable.  

Write to Tae Kim at tae.kim@barrons.com