While ride-hailing companies Uber (UBER) and Lyft (LYFT) both benefit from a network effect, we believe the two differ as well, mainly because of Uber’s significantly larger user base, which provides the platform with some leverage in attracting the supply side—drivers. In addition, we believe Uber’s network effect is strengthened by the complementary network effect that its more-diversified business has created. This is why, despite the company’s past troubles, we favour Uber stock over Lyft.

At the same time, we don’t see—nor do we expect to see—Uber attempting to displace Lyft with aggressive pricing, as both companies focus on hitting profitability. We expect the ride-hailing duopoly in the United States to remain overall. However, we think Lyft’s lack of a complementary network effect may cause the company to become an acquisition target for a player with a complementary offering, like DoorDash. Lyft could also expand into deliveries by making acquisitions of its own—Grubhub comes to mind—but we do not expect the number-two company in ride-sharing to make headway in business expansion by purchasing another runner-up in an aggregate-demand environment.

Meanwhile, we believe the demand side of the ride-sharing market is progressing toward a full recovery from the coronavirus pandemic, although macroeconomic uncertainties may slow that recovery in the short term. Both Uber stock and Lyft stock are down significantly this year. However, we remain confident about these companies and view them as attractive long-term investments. We favour Uber slightly over Lyft, given the number-one player’s diversified business and stronger network-effect moat source.

Why we favour Uber stock

  • Uber and Lyft benefit from the two-sided network effect, which has led to a ride-hailing duopoly in the U.S. Uber does have an advantage on the supply side, which will allow it to continue to scale more quickly than Lyft, indicated by its impressive driver utilization.
  • Demand for ride-hailing continues to recover, benefiting Uber and Lyft. However, based on our data, longer wait times for Lyft requests could hit the platform’s supply/demand. Our data does not indicate aggressive pricing by Uber, further supporting the assumption of price stabilization and no change in the duopoly.
  • With both stocks trading at steep discounts to our valuation, we prefer Uber’s stronger network effect.