Uber and Lyft Investors Are Looking for Signs of a Détente

(Bloomberg) -- Lyft Inc. halted its electric bicycle program in San Francisco after at least two of the bikes' batteries caught fire—only a couple weeks after the company put them on the streets.

A flaming Lyft vehicle is somehow a fitting symbol for investors' worst fears about ride-hailing. Lyft and Uber Technologies Inc. are asking investors to trust that they will someday stop figuratively setting on fire hundreds of millions of dollars or more a quarter.

A key test for their businesses comes next week in their quarterly financial reports. The stocks haven't performed particularly well since going public, and the question for investors is whether the two companies can demonstrate that their price war is deescalating. Will burn rates fall after raising prices around the country?

More directly, does the business model work? Even if a ride costs more, will enough people be willing to summon a car, instead of just walking or taking public transportation? That's a pathway to profitability. Can it get there?

That is the more existential question, though there are more immediate matters. For example, Lyft staff learned this week that they were losing Jon McNeill, the well-respected chief operating officer. Meanwhile, Uber, worried about organizational bloat, is firing 400 people in marketing. In Uber Chief Executive Officer Dara Khosrowshahi's email to employees about the decision, he wrote, “Today, there's a general sense that while we've grown fast, we've slowed down.”

That gets us closer to the big question: Will the billions of dollars in losses Lyft and Uber have sustained translate into profits someday? Next week, investors will look for any clues in the companies' financial projections.

Both apps raised prices toward the end of the second quarter, and forecasts for this quarter may be telling. Analysts predict Lyft will generate $397.3 million in gross profit in the third quarter, according to an average of estimates compiled by Bloomberg. That's a measure that accounts for the cost of generating revenue (think insurance payments and transaction fees) without accounting for marketing, research and development and corporate headcount, among other factors. If Lyft hits the mark, it would translate to a 51% increase from last year.

Uber complicates the analysis somewhat. Its third-quarter operating loss is estimated to be $4.96 billion. Yes, you read that right. The figure accounts for costs related to the initial public offering. Lyft posted a similar, albeit much smaller, expense in a previous quarter.

Drivers aren't benefiting much from the fare increases; much of the extra revenue goes into the companies' pockets. Rides might be more profitable, but will they remain as plentiful? Analysts will be looking for any signals about customer demand.

It's pretty amazing that Lyft and Uber still face these basic questions about a decade after the businesses started. There was a time when the two companies argued that high-capacity services like carpools could drive down prices while improving financial health. That seems to be less of a focus now.

Another potential way to achieve profit is to diversify. That was part of McNeill's strategy during his brief tenure, lasting less than two years. He had pushed the company to open repair shops for Lyft drivers. It remains to be seen how that vision progresses without him. As for the bicycles, Lyft said it's investigating the matter and will update the battery technology. The situation highlights the downside of betting on an untested new product: Sometimes they catch on fire.

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To contact the editor responsible for this story: Mark Milian at mmilian@bloomberg.net