Richard Windsor
27 November 2017

Uber vs. Lyft – Blood in the water

This is Lyft’s best chance to catch Uber

With yet another skeleton emerging to hinder Uber, Lyft is increasing its recent fund raising by $500m as it has realised that now is its best chance to reel in Uber. Lyft has increased its recent $1bn round that was led by Google and CapitalG by another $500m bringing the total post-money valuation to $11.5bn. The extra money will be invested in passenger and driver products which basically means reducing the fares and increasing driver take-home in a bid to gain market share. 2017 has been a great year for Lyft but only because Uber has pretty much had the worst year imaginable.

Constant turmoil, management turnover, bad press, unhappy drivers and a series of scandals has led to the company focusing on anything but its core business in 2017. This has taken another downward lurch with the disclosure that it suffered a data breach on 57m users and failed to make the users aware that their data had been compromised. This is exactly the kind of bad press that Lyft can capitalise on when it comes to tempting existing Uber users to consider trying Lyft. So far in 2017 this has been very successful as Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year. This leaves Uber on 66% which based on my rule of thumb for network based businesses, is still enough to eventually win the market, but its margin for error has been substantially reduced.

This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit. Coming into 2017, Uber had a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 6%. Furthermore, with Google is now backing Lyft as the best way for it to get its self-driving technology (Waymo) to market, this gives Lyft much deeper pockets than it had previously. This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat. If Lyft can take another 6% or more of market share from Uber, Uber will have lost its hallowed status and as a result we would expect its financial performance to deteriorate materially.

All of this plays in Lyft’s favour as Uber’s reputation is now in such a bad state that it has to tread very delicately wherever it goes. This means that the aggressive expansionism that gave Uber its dominant share is no longer possible handing all the initiative to Lyft. We have been very negative on Lyft to date as its position looked hopeless but with Uber constantly shooting itself in the foot has given it a fighting chance. There is no way we can justify a $70bn for Uber given this outlook, and if Softbank is offering this to shareholders to build its stake,  this represents a great opportunity to exit.

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