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Uber subscription ‘more compelling to users,’ analyst says

Tom White, managing director and senior research analyst at D.A. Davidson, joins Yahoo Finance Live to discuss his Buy rating on Uber and how the ride-share company is poised to grow compared to Lyft.

Video transcript

- We're tracking the ridesharing race with Uber potentially pulling ahead of its rival Lyft. But the reasons go deeper than just driver rates and fees. Let's bring in Tom White, DA Davidson senior research analyst.

Tom, it's interesting because it feels like the argument is really shifted when you look at Lyft and Uber specifically. It is about diversification. Uber's got a lot more of that in terms of their revenue stream. Talk to me about your thesis and why you like Uber over Lyft.

TOM WHITE: Yeah, look, we're positive on both names, have buy ratings on both names. Long term, I'm a pretty firm believer that the ride share marketplace that has the most liquid supply and demand dynamics is going to be the long term share leader.

And by liquid I mean, if you can attract the most drivers to the platform because you offer multiple products beyond just ride sharing, things like online food delivery, online grocery, online alcohol, that's going to, in turn, attract more diners, more consumers, and it sets up this sort of virtual virtuous cycle, that I think will enable over time Uber to certainly maintain and grow its scale advantage, probably have better long term profit margins than just a single product marketplace like Lyft.

On the flip side, Lyft is taking a little bit different tact here. They're really specializing in all things transportation. They're focusing much more on cost controls and efficiencies at this point than maybe Uber is.

And so you're seeing nice profit and EBITDA flow through for Lyft which we think can support the stock here. But longer term, we think just the size of the opportunity is more compelling for Uber, obviously.

- Yeah. Even with that thesis, $62 price target is pretty high when you consider where the stock is trading out right now. What's going to be the big catalyst? Is it really about their other offerings aside from ridesharing?

TOM WHITE: Yeah, look, I think, yeah, as far as the price target, this is a fluid market, a dynamic market. It's hard for us to sometimes stay completely fresh with our price targets relative to just what's happening in the market.

But look, I think with Uber, a couple of things going on that are what's going to drive profit margin expansion. And that's really the main thing that's going to get the stock moving.

And one is just the broader recovery in the ridesharing business, back to normal, back to work, all of those things will help propel that rideshare business, which is structurally Uber's most profitable major product line at the moment.

Past that, you've got things like advertising, which is relatively small, relatively nascent, but a very high margin revenue stream for Uber that's growing very quickly.

And then also things like subscriptions and loyalty programs. That's another nice benefit of having multiple products within Uber's marketplace.

We think it makes their subscription offerings more compelling to users because you can obviously get perks and value in multiple different products. We think over time, that results in a more steady, more visible revenue stream and probably something that investors, I think, will be willing to ascribe a higher multiple for, for the overall business as a result.

- Uber and Lyft certainly facing the same economic headwinds whether that's inflation, gas prices, whether that is riders who are saying, well, maybe I don't want to spend so much on getting a ride.

But interesting point you make which says that you think that it could actually, it as in inflation and some of those macro headwinds, could actually serve as a tailwind for Uber in driver supply.

Are you already seeing some of those drivers come back to the platform, maybe to earn a little extra cash?

TOM WHITE: Yeah. So look, clearly, what's happening in the broader macro, what's happening with inflation is a looming threat for both Uber and Lyft. And both of these companies have been able to raise prices pretty significantly over the last, call it, three or four quarters. That's helped drive their revenue.

And if we're headed into a sustained macro slowdown or a recession, you're certainly going to see some resistance by riders to using these products. So I don't want to overly discount that all is well at Uber and Lyft. Obviously, there are these looming storm clouds, so to speak.

But there are a couple of offsets just inherent in the business. And one of those relates to driver supply as you touched on.

If folks are out there, contending with higher prices just generally in their lives, you might see, and you're starting to see already, signs that drivers will be attracted to coming to these platforms to generate some extra income to offset either higher prices or maybe lost revenue or lost income from another job or something like that.

So driver expenses is one of the major expense for a rideshare business. And this helps improve the supply landscape of drivers, which is a nice little offset.

- Yeah. It kind of takes you back to what we saw post financial crisis, where a lot of these sharing economy type companies took off because people are looking for extra income. We'll see if that takes hold.

Tom White, DA Davidson senior research analyst. Good to have you on today.