Ride-hailing market has potential to be 'a stable duopoly' between Lyft and Uber: Analyst

RBC Capital Markets Equity Analyst Brad Erickson joins Yahoo Finance Live to discuss the outlook for ride-hailing companies Lyft and Uber.

Video transcript

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- Well, Uber has been one of the big winners on Wall Street today. Take a look at that. Shares soaring well above 10% after the ride-hailing giant reported its Q1 earnings. Uber not only beat estimates on the top line, revenue for the quarter skyrocketed by 29% year over year.

Joining us now is Brad RBC Capital Markets equity analyst. There's the obvious beats that you point out that we saw today, but I want to start with what you saw in the report that may have surprised you. What stood out?

BRAD ERICKSON: Yeah, I think the big debate on Uber as we think about, certainly, this year and into next year, is I think everybody understands now that they're going to hit profitability targets-- probably exceed them, frankly. But I think people are concerned that expectations may be too high over the next few years on bookings growth in particular. And I think we know that prices have increased. We know that Uber has benefited a lot from that in the last couple of years since the pandemic.

Frequency is the thing that has really held them back, frequency meaning how often the individual consumer is riding, is actually significantly lower still than pre-pandemic levels. Today's report highlighted a 10% increase in mobility frequency in particular. That's meaningfully better than I think a lot of those folks who don't believe in the story at this point. And so I think when you're adding customers and you're adding frequency, you give a lot more credence to a 15%, 20%, 25% long-term bookings growth outlook.

- Brad, what about whether or not this momentum can stay intact? Because I think Uber has really weathered the slowdown in the economy, higher inflation, much better than many analysts had initially anticipated.

BRAD ERICKSON: Yeah, I think they still have some very unique drivers that are helping the business rebound in general. I think one of the things they talked about today was companies are getting a little bit more hard line-ish on getting employees back to work. They benefit from commuters in particular, even more so than Lyft, in fact. Travel, we know, is super strong, both in the US, also Europe. A lot of the travel companies we covered talked about European strength. And so I think as you get a lot of those airport rides, that is a disproportionate contributor here as well.

So I think you do have areas of strength even, as you pointed out, the inflationary environment is tough. These companies also have pricing power. And that's really, I think, reflected in the results that we've seen here lately.

- Brad, you talked about the mobility part of it. Certainly, there's still more upside when you think about where we are in the return to work. Uber stands to benefit from that. What about the Eats business? How are you looking at that right now? Because for so long, especially at the height of the pandemic, that was seen as the big driver when people just weren't taking the rides.

BRAD ERICKSON: Yeah, I think that business continues to grow better than anyone thought. For the last year as inflation ticked up so significantly, everyone was convinced that the consumer was eventually going to fall off a cliff. And it's become this bogeyman type of thing, and it just hasn't materialized. And I think between DoorDash and Uber, we continue to see evidence that people are continuing to order online for delivery.

I would say at this point, there is some evidence to support the view that people are ordering fewer items, potentially, so item elasticity. But they are spending more as a function of those higher prices, and they're continuing to order. And so long as we can tell, that trend continues.

- Brad, in this call, management didn't shy away from commenting about their big competitor out there, Lyft. They did say that they're a very, very strong brand. They're not going anywhere. They've gotten more competitive on pricing. How big of a threat, realistically, is Lyft right now to Uber in terms of regaining some of that market share that they've lost?

BRAD ERICKSON: Yeah, I wouldn't say they're a threat too much. I do see this market as potentially having the potential to be what I call a stable duopoly. Longer term, Lyft does need to right the ship. They've had to reduce price. And we do think that that is driving some reversion in terms of market share. I think that's a temporary thing. I think you will see this market get back to an equilibrium level in terms of market share.

If anything, Uber could turn the screws. They could affect change. They could push Lyft's market share down further. They don't want to do that. They're being super rational operators. They are tracking towards these profitability targets. And I think structurally, they know they're still in a good position. We believe they have a structural advantage, in fact, because of the scale that they have both on the rider and the driver's side.

- Finally, Brad, you've got a $46 price target on the stock. We're what, $36? So more upside here. What do you think is going to be the biggest driver that gets you there?

BRAD ERICKSON: Yeah, so what needs to happen-- I think, like I said earlier in the program, investors generally already believe in the $5 billion EBITDA target that the company has pointed everyone to for next year, so in 2024. So there's not a lot of intrigue around that in the stock. I think where the debate is and the wall of worry to climb is on that top-line bookings growth.

And so I think as you move through this year, as the market gets better, evidence potentially that this can be a 15% or 20% grower in the outyear-- that $5 billion I mentioned is going to be a $7 billion, potentially, in '25 and grow thereafter. That's where the stock will suddenly appear very underappreciated and can work towards our target.

- All right.

- Brad Erickson, great stuff. Thanks so much for looking at Uber, up just about 11% today, up 47% year to date.