[By Ali Mogharabi]
We have lowered our fair value estimates for Uber (UBER) and Lyft (LYFT) to reflect the negative impact of the COVID-19 coronavirus on the ride-hailing companies’ revenue in 2020 and 2021. We now value Uber at $53 per share (down from $58) and Lyft at $67 per share (down from $72).
We believe the risk of the coronavirus, which continues to increase as additional data regarding its spread comes in, will lower not only the demand (riders) for ride-hailing but also the supply (drivers). A potential decline in overall air travel will also reduce ride requests from and to airports. With many corporate conferences and events being canceled, growth in those companies’ business services is likely to be impacted as well. While we view this as a temporary shock, it could endure longer than we expect, which could delay recovery or a bounce-back for more than 12 months. While the current outbreak will lower top-line growth for both Uber and Lyft, we think that is already priced into the stocks. Both narrow-moat companies require patience, but we believe they remain attractive, trading well below our fair value estimates.
We have reduced our revenue growth assumption for Uber to 16% from 20.7% for 2020 and to 19% from 22.4% for 2021. For Lyft, our 2020 and 2021 top-line growth assumptions now stand at 16% (down from 20.5%) and 21% (down from 22.2%), respectively. In our view, the spread of the disease will lower demand for Uber and Lyft services in a variety of ways.
First, the initial fear about the virus, which according to the World Health Organization has a 3.4% mortality rate, is likely to keep consumers at home, which will lower ride requests. Potential riders who continue to commute or remain outside are more likely to use their own cars for a transportation substitute than Uber or Lyft. Public transportation will not be a substitute because the presence of many other riders may increase risk of contracting the virus. Plus, riders may also face the risk of getting the virus from drivers, although the likelihood is less than when using public transportation. On the basis of these assumptions, we see some riders again becoming drivers and using their own vehicles more. In addition, with fewer commuters, traffic will lighten a bit, and more parking spots will become available, all of which could make driving a better option for the time being. For these reasons, we are also assuming that drivers will be less willing to provide services for Uber or Lyft.
Second, as the virus has spread globally, it has reduced global air travel and will continue to do so; this lessens demand for Uber and Lyft to and from airports. Uber says approximately 15% of its gross bookings come from trips to and from airports. For Lyft, we assume that 10%-15% of its net revenue comes from airport requests.
To get a clearer picture of how the spread of this coronavirus will affect airport trip demand, we analyzed the effect of severe acute respiratory syndrome on international visits to the United States in 2003. We applied a higher reduction in demand growth to our Uber and Lyft models than what took place during the SARS year, given COVID-19’s higher severity. According to WHO, there are already over 93,000 cases of this coronavirus around the world, significantly above the 3,389 SARS cases (which we consider as a comparable epidemic) after one month.
During the SARS days, international visits to the U.S. declined 20% year over year in March 2003, when WHO first issued a global alert. This was also partially due to the start of the Iraq War. The decline continued at an average year-over-year rate of 7.6% through September 2003, according to the National Travel & Tourism Office. For the full year, international travel into the U.S. declined 4.2%. According to the World Bank, air passenger travel within the U.S. fell 1.6% in 2003 after averaging 4.6% annual growth for the five years before 9/11. Globally, after average annual growth of 5% during 1996-2000, that figure stood at only 2% in 2003 (based on World Bank data). We think the decline in the U.S. and the significant deceleration globally were also due to SARS. Given the higher severity of this coronavirus, and the fact that fewer international visitors also lowers requests outside of airports, we applied a higher reduction to our initial assumption for Uber’s ride-hailing gross booking growth and Lyft’s net revenue growth.
Third, given the cancellation of or the refusal by different companies to attend some corporate events and conferences because of COVID-19, we think demand for Uber’s and Lyft’s enterprise services will decline. As mentioned in Barron’s, these events include the Mobile World Congress, Google’s Cloud conference (which will be done digitally), Facebook’s F8 developers conference, the Game Developers Conference, Intel Labs Day, the Geneva International Motor Show, Shopify Unite, ITB Berlin (a global travel trade show), Nvidia’s GTC, and many more.
Regarding the Uber Eats business, we disagree with management; we think diners’ and drivers’ fears of becoming exposed to the virus will affect trips or orders. Uber CEO Dara Khosrowshahi said on March 4 that this segment could benefit, because if more people stay at home, it is likely that delivery orders will increase. We are not as confident that the fear of the virus will make diners feel safer about ordering food for delivery. We think it is as likely that those diners will feel safer if they drive to pick up the food. However, we are assuming a lesser hit on the Uber Eats business from the virus than our projection for the hit Uber’s ride business will take.
Lastly, we think that both companies will recover from this, although it will take until next year. While Lyft’s management said that the virus has not affected first-quarter business, we think the further slowdown in revenue growth we’ve discussed will probably be seen in the second-quarter numbers. On March 4, Khosrowshahi said Uber’s business had slowed down a bit. We think this may continue throughout the year as the spread of the virus in the U.S. may worsen. However, we believe those risks are currently priced into the shares, which is why we continue to recommend both names.