[By MATT KRANTZ]
Quarterly earnings season isn’t just about measuring profit. It’s also a periodic glimpse into the financial strength of companies investors hope might join the S&P 500 one day.
Hopes are high for ride-sharing companies Uber Technologies (UBER) and Lyft (LYFT). Just this year, shares of Uber and Lyft are up 35% and 9.3%, respectively. That’s impressive if you consider the S&P 500, itself off to a strong start, is up just 4.4% and it contains neither of these stocks. They’re also large holdings by millennials.
But stock-price moves are just part of what winning long-term stocks need. Both Uber and Lyft are missing something important to both successful growth stock investing and S&P 500 inclusion: profit.
And a closer look at both companies’ quarterly numbers, and cash burn, reveals neither have forever to figure this profit thing out.
A Look At Lyft’s Free Cash Flow
Lyft is in a much stronger financial condition than Uber. It has a substantially longer time to find how it will turn its popular service into profit. Lyft’s $2.9 billion in cash would last roughly seven years (30 quarters) based on its operating cash burn in the just-reported quarter.
The company, which reported its profit this week, posted a whopper of a quarterly loss: $356 million. A closer look, though, shows it burned $96 million in in free cash flow during the quarter. Assuming the company can hold cash flow steady, it has runway to figure out its business model.
Analysts think Lyft will lose $509.7 million, excluding charges, this year, based on data from S&P Global Market Intelligence. That’s a slight improvement from the $652 million it lost in 2019. And yet, Lyft isn’t expected to post a profit until 2022.
So while Lyft can keep driving, it’s not a compelling stock. Given the stock’s murky current and annual earnings, it sports an IBD Composite Rating of just 35.
Uber: Even Less Runway
Uber is larger than Lyft, but so are its losses. And that means the company had better figure out its profit plans in a hurry.
It’s true Uber ended 2019 with a pile of $11.3 billion in cash and short-term investments. But that’s not going to last long at the pace of cash burn in the fourth quarter. In fact, the $11.3 billion would run dry in just shy of six quarters. That’s just a year-and-a-half from now.
Uber posted a $1.1 billion net loss in the fourth quarter. But it actually burned cash at a much quicker rate of $2 billion during the period. You can’t do that for long.
And analysts see Uber losing money until 2022. Uber is expected to lose another $2.1 billion in 2020 and nearly $600 million in 2021. Only then, do analyst see Uber making $1 billion in 2022. Now you understand Uber’s low 68 Composite Rating.
Uber And Lyft: How Long Cash Will Last?
Companies must be profitable for at least four quarters to join the S&P 500. That’s why cash burning companies are so rare in the index. It’s also why money-losing Tesla (TSLA) isn’t part of the S&P 500, yet.
During the fourth quarter, only 31 S&P 500 companies posted negative free cash flow, says an Investor’s Business Daily analysis of data from S&P Global.
The biggest cash burners don’t surprise.
Hammered by strike-related slowdowns, General Motors (GM) burned $3.2 billion in free cash flow in the quarter. Luckily the firm has $20.5 billion in cash and short-term investments. Shares of GM are down 3.6% this year and down 9.5% in the past 12 months.
And then there’s Boeing (BA). Racked with problems with its 737 Max model, the company burned $2.7 billion in free cash flow during the quarter. All told, Boeing has burned $4.3 billion in free cash flow in the past 12 months. That eats into its $10 billion pile of cash and short-term investments. And thus why Boeing’s stock is down 17% in the past 12 months (although it’s up 5.2% this year).
If you really want to own Uber or Lyft, diversify your bet. Both are industrials companies. The Renaissance IPO ETF (IPO) has a larger weight of its portfolio in Uber than any other ETF: 12.3%. And Lyft? It’s a 3.9% holding in the Renaissance IPO ETF.
And certainly, both Uber or Lyft could raise more cash by borrowing or selling more shares. After all, Tesla plans to sell shares to raise cash.
But now it’s up to these stocks to get their cash flow moving in the right direction.
Time is ticking.