Gig economy stocks are ‘maturing beyond their growth at all costs’: Analyst

Michael Morton, senior research analyst for internet stocks at MoffettNathanson, joins Yahoo Finance Live to discuss maturing gig economy stocks such as Uber and Lyft and how a potential recession could affect these companies.

Video Transcript

SEANA SMITH: Gig stocks seem to be back in favor. Uber, Lyft, DoorDash all up big since the start of the year. And after a decade of growth at all costs, one analyst making the call that, quote, "the bumpiest parts of the ride are in the rear-view mirror and now is the time to buy DoorDash and Uber."

Joining us now is the analyst behind that call. We want to bring in Michael Morton, SVB MoffettNathanson senior research analyst. Michael, it's great to see you here. So it certainly seems like you think the focus has now shifted from growth at all costs, something we've talked about time and time again when it comes to these companies, to profitability. What makes you so convinced, so confident that that shift has, in fact, happened and will stick?

MICHAEL MORTON: Yes, thank you for having me on. So there's a couple of factors behind it. These are enormous addressable markets, some of the biggest spend pie you could really find in technology investing. And these companies grew at breakneck pace for a decade. I mean, Uber 2009 founding to over $100 billion in bookings. The food-delivery industry alone from pre-COVID to today added $60 billion in bookings.

This was a pace where you're growing as fast as you possibly can and hiring people as fast as humanly possible, and at some point when the growth rate starts to decelerate, you see an increased focus on profitability. The market was rewarding companies like this for a really long time, especially the private markets, to just grow. Don't worry about profits.

And we think, based off of the language coming from the companies-- if you look at DoorDash's CEO letter to employees in November, tweets from the CTO and cofounder or also the CEO of Uber. Dara wrote a letter about a focus on free cash flow. If you read the proxy report, his incentive compensation is heavily weighted towards adjusted EBITDA growth.

So we think these companies are maturing, not to where they don't have growth in their future but maturing beyond the growth at all costs and to now showing profitability growth for shareholders.

DAVE BRIGGS: What about the potential backdrop of a recession? Some have come on this program and suggested that actually the price of cars is going to be a catalyst for companies like Uber and Lyft, but it seems-- it seems counterintuitive. It seems like a recession would be very harmful for both of these companies.

MICHAEL MORTON: Yeah, so there's two sides of this question. One is the driver supply side where, as it's no secret to everybody on the show, that record-low unemployment rates-- all of the big retailers have increased their minimum wages dramatically over the last several years. It's simply harder for Uber and Lyft to convince people to be drivers. And DoorDash has done slightly better to the fact that it's less intimidating to pick up a bag of food than allow a stranger to get in your car, and you see the demographic shift as well where DoorDash has basically half female drivers. So it's been an overhang on these companies for the last several years as you have record-low unemployment. Now as that could reverse in a weak macro environment and people are looking for kind of the incremental money on the weekend or a Thursday night to kind of help fill in for their budgetary constraints, it's good for the driver supply side.

Now, the other side of that equation and the question around macro pressure for these companies is going to be, well, what about the consumer? Like, it's no secret that it's more expensive to take an Uber across town from the East Village to the West Village versus a $3 L train. Or what about picking up food versus having it delivered? If you're talking about McDonald's, our report shows an 80% price increase between picking it up in real life or ordering it from Uber or DoorDash.

Now, we tried to look at historical examples. Now, these companies didn't exist in prior macro downturns, right? They weren't even conceived yet. And we looked at how consumers behaved for taxis and how consumers behaved in restaurant spend, and both were incredibly resilient in weak macro environments. Taxicab spending in 2008-2009 only declined for three quarters, low single digits. Restaurant spend is incredibly resilient. In the '01 recession, it grew through the recession. In 2008-2009, only three quarters of year-over-year declines, and it was 1% to 2%.

And this kind of overlays on a long-term consumer trend of spending more money on people preparing food for them. So that's a long answer, but the macro aspect weighs on both sides of these businesses.

SEANA SMITH: Well, Michael, what about Lyft? Because while you still are positive on Uber, you have a market perform rating on Lyft. The stock is actually off to a very, very strong start to the year. Why are you still on the sidelines?

MICHAEL MORTON: Yeah, so Uber did an incredible job of building a scaled network that creates a network effect on both the supply and the demand side. And there's some crossover around people delivering food and being Uber drivers for regular fares.

Lyft is focused just on the US, and there are aspects of this business where you benefit from scale and network. If you look about the advertising and marketing dollars that you have to spend as just a percentage of your bookings, Uber and DoorDash get a greater benefit as they get larger and the advertising intensity declines.

Now as you have more people downloading an Uber app than a Lyft app, it's harder to recruit drivers. This goes back to that unemployment question and driver supply. Lyft has to keep spending money to convince drivers to work for Lyft and pick up fares, and it's a scale game. They're just in a tough spot.

We're market perform. We're not overly negative on it, but we're taking just a balanced approach towards Lyft. We want to see more proof in the numbers before we can get too excited that they're able to get out of this tough predicament that they're in at the moment.

DAVE BRIGGS: All right, got to leave it there. Michael Morton, MoffettNathanson, good to see you.