Shares of Lyft Inc. (NASDAQ:LYFT) plunges around 35% in early trading session on Friday following a bleak forecast that fueled fears that the company will have to cut prices and sacrifice profit to avoid finishing second to rival Uber in the North American ride-sharing market.
Both companies have been locked in a battle for market share since the pandemic’s lows, with the latest earnings showing Uber’s larger scale and pricing power allowing it to profit from the resurgence at the expense of its rival.
“Rideshare is now approaching full recovery in the United States, but Lyft is not,” said J.P. Morgan analysts, who were among 13 analysts who lowered their price targets on the stock.
If premarket losses continue, Lyft shares will have their worst day on record. This year, the company was expected to lose $2 billion in market value and nearly all of its stock price gains.
On Thursday, Lyft issued a first-quarter profit and revenue forecast that fell short of market expectations, in stark contrast to Uber’s strong profit forecast and better-than-expected earnings.
“This forecast continues Lyft’s recent trend of growing slower than the broader rideshare market… putting a greater emphasis on Lyft’s scale and platform breadth relative to Uber,” Canaccord Genuity analysts said.
Lyft’s driver supply returned to pre-pandemic levels in the fourth quarter, while Uber’s driver supply reached a new high.
However, as driver supply improves, Lyft will see lower surge pricing in the first quarter, according to company executives.
In January, the company had to lower its prices after Uber dropped its fuel surcharge earlier that month, while analysts said Lyft’s larger presence on the West Coast also weighed, as many technology companies there have not returned to work.
“Lyft is making the difficult trade-off of lowering prices to aid conversion and prevent further share loss to Uber,” Needham analysts said. “Despite the positive comments on demand, we do not believe volume will be sufficient to offset lower prices.”
Lyft reduced base ride prices in January to compete with Uber’s similar move. “The competitive dynamics have changed in comparison to three months ago,” Green said. “Competitive service levels must be prioritized.”
“There is no doubt that Lyft is lagging behind its larger competitor in terms of ridesharing growth,” said CFRA analyst Angelo Zino.
Lyft co-founder and President John Zimmer stated that the company will be price and wait time competitive. To cover higher insurance costs, the company raised the service fee that riders pay directly in October. These costs are expected to rise further. Rather than burdening riders, Lyft is willing to take a hit to profits, Zimmer said in an interview, adding that the factors contributing to the fourth-quarter earnings loss are a one-time occurrence.
Lyft, unlike Uber, only operates in North America and does not offer food delivery. To increase customer retention, Lyft Pink, the company’s subscription product, has been expanded, and the company has partnered with Grubhub to offer members a complimentary subscription to the food-delivery platform. Lyft also launched an advertising unit last year in order to generate higher-margin revenue, a strategy used by other on-demand platforms such as Uber, Instacart Inc., and DoorDash Inc.