Lyft Stock Craters, Dragging Down Uber as Driver Supply Stirs Profit Concern

Efforts to woo back more drivers could derail profitability goals, but investors remain wary that efforts to woo back more drivers could derail profitability goals.

After both companies reported quarterly results that pointed to strong demand for rides, but failed to reassure Wall Street that a driver shortage that cost the companies hundreds of millions of dollars in bonuses was not a real problem, the shares of both companies plunged.

Robert Mollins, an analyst at Gordon Haskett, said that they want to make sure that drivers don't have to keep incentivizing them.

The wait times and fares at both companies are still elevated compared with pre-pandemic levels.

The labor model is ill-equipped to address swings in demand and the driver shortage shows that. Ride-Hailing companies were able to offer lower prices because they hired drivers as independent contractors. After demand for rides cratered and many found other jobs, they were better off collecting unemployment benefits, or were more concerned about the risk of infections from being in close quarters with passengers, the workforce was disrupted.

While riders have flocked back as they resume office commute and trips to the airport, it's taking more time and money to lure back drivers and new ones. When the war in Ukraine broke out, a spike in gas prices caused a blow to recruitment efforts.

The earnings results sent shares plunging the most ever.

The two companies have different strategies for boosting drivers and meeting an expected surge in passengers as Covid-19 fades.

In the second quarter, it will ramp up spending on incentives, and it expects the supply and demand balance to return to normal once the swine flubates. The benefits of its multi-vertical business include food-delivery unit. After many drivers shifted to ferrying meals when demand for rideshare tanked, the delivery service gave them the chance to make mooney on both services.

The driver app has been changed to make it easier to see upfront fares, as well as improving maps and removing bugs. Rather than increase incentives, the company plans to focus on itsholistic product experience as a way to attract, engage and retain employees.

Tom White of D.A. Davidson said that if Lyft gets really aggressive with incentives, it could have knock-on effects on profit margins.

Both companies are concerned about the threat of erosion of profits in the course of spending more on driver incentives. In the current quarter, the company gave a forecast for earnings before interest, tax, depreciation and amortization of $10 million to $20 million, which was much lower than the $81 million Wall Street projected. The top end of the adjusted Ebitda range is $270 million, beating the average analyst estimate.

Read more about how they sidestepped the earnings debacle.

It's important for both companies to make sure their apps are cheap enough and fast enough to not turn customers away. In the first quarter of the year, the average cost of a ride in the U.S. increased by 45% compared with the same period in 2019. Gordon Haskett analysis of 30 cities showed that the average wait time for the week ending April 29 was six and a half minutes, reverting back to December levels when shortages were more pronounced.