Investors in tech growth companies are vigilantly monitoring the paths to profitability for the San Francisco ride-share giants Uber and Lyft.
While many expect Lyft to reach the green first, the argument that Uber might do it first - and fast - is also clear.
In the next year or two both companies are expected to reach major turning points, as both get serious about becoming mature profit-generating entities.
In early November Lyft management said it expected the company to turn an operating profit by Q4 2021, a development that's largely not in Wall Street's current model for the company.
Analysts polled by FactSet are estimating that Lyft will post a 2020 loss before interest, tax, depreciation and amortization of $500 million on $4.6 billion of revenue. And Wall Street is looking for Uber to generate a 2020 loss on that basis on revenue of $18.1 billion.
So it won't exactly be easy for either company to turn a profit this year. And estimates for 2021 call for significantly narrowing losses for both companies.
Many analysts have touted the combination of more rational ride pricing and leaner cost structures as the core drivers to profitability. (Price rationalization is the idea that both companies are well marketed and dominant enough to increase prices after years of competitive price-cutting.)
While costs related to drivers will increase, those costs as a percentage of revenue are likely to shrink meaningfully. Growth in marketing expense also can moderate in coming years.
Here's the argument:
RBC Capital Markets analyst Mark Mahaney wrote a note outlining 10 potential internet-stock surprises for 2020. He defines a surprise as "an event that the average Internet investor thinks is highly improbable but we believe has a reasonable" - 30%-plus - chance of occurring.
And the big potential surprise here is that either Uber or Lyft, or both of them, could turn a profit in 2020.
But Uber, Mahaney says, "has more path-to-profitability levers because of its greater scale and because it has the options to potentially close down some of its material loss-generating assets, like Uber Eats India."
Uber Eats, a delivery business in its very early stages, is losing a great deal of money: Eats posted a loss on an Ebitda basis of $316 million on $645 million of revenue.
But the company said on its Q3 earnings call that Eats is Ebitda positive in 100 cities. This means Uber can cut out some of the segment's most costly geographies.
Meantime, Uber is in more geographies than Lyft and can use its name recognition to increase ride-share prices.
This doesn't mean, of course, that Lyft can't raise prices as well. And while both have room to moderate the growth of cost-of-revenue items like driver insurance, Uber could potentially curb its marketing spend a bit more.
Regardless of which company turns a profit first, the impact on the two stocks could be meaningful.
Uber and Lyft are down 31% and 39%, respectively, from their IPO prices, as investors have grown wary of money-losing new tech firms.
But both trade at forward price-to-sales multiples of 2.8, low compared with most early-stage growth stocks. And Wall Street has recently flagged the valuation metric as a reason for bullishness on the stocks.