The latest analyst to initiate coverage on the newly public Uber (UBER) , Susquehanna Financial's Sayim Patil, isn't bearish because visibility into the path to profitability is limited, but rather because he isn't confident Uber can grow revenues to the extent many investors assume it can.
This view is in stark contrast to that of Wedbush Securities' Dan Ives, who is bullish precisely because he thinks Uber can capture a large chunk of the growing ride-sharing market, although its currently onerous cost structure will eventually have to abate for the company to turn a profit.
Patil has a price target of $42 on the stock, only a hair above its current level of $41.63, which it fell well below on its first day of trading, which saw the first trade change hands at $42. Ives has a $65 price target, suggesting 56% upside.
Meanwhile, much of the bull and bear debate on both Uber and Lyft (LYFT) has centered on path to profitability. Several analysts who initiated coverage of Lyft after its IPO said one of the biggest risks to the stock is the company's seemingly invisible path to profitability. Lyft saw a significantly wider net loss in 2018 over 2017, losing $211 million, although it did report a slimmer loss than expected in its first reported quarter as a public company. Uber is also far from profitability.
Patil doesn't disagree that Uber's potential to be a leader in the ride-sharing market is discernible. "Slowing growth, however, creates uncertainty around future trajectory," Patil wrote in a note out Tuesday morning. Patil pointed out that bookings growth is now hovering around 30% year-over-year in the first quarter of 2019, markedly slower than the 50% growth range seen in the first quarter of 2018. In the same period, adjusted revenue growth is down to 14% from 85%.
Meanwhile, Lyft's revenue growth in its first quarter of 2019 was 95% year-over-year, a stat that, when compared with Uber's growth rates, shouldn't please Uber investors. The total market for ride-hailing is expected to reach $133 billion by 2023, and to grow from there, according to data aggregated by Statista. If Uber is to be a leader in the market, alongside Lyft, it seems conceivable that it would still see impressive revenue growth, although the latest trends have Patil concerned.
Ironically, Patil sees Uber reaching profitability in 2023, but simply doesn't see the scale in the company others see.
Another headwind to the stock, Patil said, is the fact that the financial model is very complex.
"They can always cut costs, but in terms of levers, it's really going to be more through growth in driving the top line, rather than expense controls," Ives told TheStreet. "It's more on the revenue side in terms of their [Uber's ability] to to drive profitable ride-sharing."
On the cost side, "Over time we believe area such as insurance and marketing could see scale and help Uber get out of the red, although this remains a hot button debate among investors that will not be solved overnight." Those costs, for both companies, remain at a high percentage compared to their revenue. Uber's operating expenses (excludes cost of revenue) was 77% of its revenue in 2018. Ives thinks that cost structure will soon normalize.
Ives has noted in the past that Lyft is creating loyalty features for both riders and drivers, such as location matching riders and drivers, and creating a cash account for drivers who want to quickly access earnings. "Lyft is doing a commendable job of building more loyalty among drivers and its ecosystem domestically," Ives said. Still, "Uber has the major brand recognition and dominance with 90 million+ consumers and 4 million drivers, maintaining customer loyalty will be the golden goose of its success over time."
Ives models revenue of $14.84 billion for Uber in 2019, compared to Wall Street's consensus of $13.8 billion, according to FactSet.