Lyft - LYFT (Buy)
This is an interesting company for me. Late to the ride share business, operating in fewer markets than their competitors, smaller market share, and having to face the same criticisms over gig-economy workers being employees.
What has my attention about Lyft versus their competitors, and why am I interested in a transportation-as-a-service company which operates only in the US and Canada?
What Does Lyft Do?
The phrase transportation-as-a-services doesn’t give you that many clues, they could be running a bus loan service. At the core of their business is using technology to make transportation better for individuals. This is a slightly different take compared to a company like Uber which uses technology to solve logistic and fleet management issues. Both result in similar outcomes but play out with different business investments and focuses.
Unlike other firms, Lyft doesn’t make it completely clear all their business lines and services just by looking at their investor relations page. One of those, if you know you know kind of deals.
I had to read the full SEC filings to get some useful information. Lyft likes to group everything and talk from the perspective as a group, which isn’t useful when it comes to breaking down their bets and individual risks.
Source: Lyft Full Year 10-K SEC Filing
Ride sharing marketplace
The core offering, this is the platform that connects drivers and riders. It’s more than just a marketplace, this also controls surge pricing and predicting rider flow. Like Uber this is a key piece of IP, knowing where your drivers need to be so they make money and knowing when to expect rides so there is never a shortage for riders.
Bikes and scooters
Shared bikes and scooters in major metropolitan areas is a growing trend, no doubt you’ve seen this yourself. When thinking about transport you’ll often here bikes and scooters referred to as “the first-mile and last-mile of a multimodal trip”. This is for short walking distances, part of a larger journey rather than trying to get walkers to start scooting about. These are “dockless” as well, which means they employ staff to go around and move these bikes and scooters so they are always available where you want them to be.
Lyft believes they operate the largest bike-sharing platform in the US, but all we care about is they have exclusive city partnerships in a majority of locations, like including New York City, the San Francisco Bay Area, Chicago and Boston.
I joked they could just be running buses, turns out that’s not completely false. Their public transit business is just displaying transit options, this generates no revenue or fee. As part of their business, it’s all about engaging with their app and product suite. Looking up and planning travel with Lyft means giving over your valuable data.
Now we are getting to the juicy bits. Lyft partners with Waymo and Aptiv (plus a few others) to make this happen. They have deployed a fleet of autonomous vehicles in Las Vegas where it is revenue-generating. Over 100,000 rides in Aptiv autonomous vehicles with a safety driver since January 2018.
Most firms in this space also end up vertically controlling the experience. It starts with mandating the cars which can be used, and quickly brings them into the world of car rentals to drivers and offering insurance. However, rentals now include a new offering which they have started testing in 2019. Renting cars as a rider for things like a weekend away. This is temporary car ownership. While a tried and tested business from the era of airport car rentals, this is another growing revenue line in a world where car ownership is at risk.
The Competition Summary
Let’s take a look at the fundamentals of Lyft and their competitors, this is a quick comparison to see the health of each company and to frame where they stand as investments.
Source: Genuine Impact
Good debt control, not profitable, and doesn’t pay any money out to shareholders. Very expensive to buy as they aren’t profitable and the share price is predictive of them growing. Poor future revenue, but very strong future earnings, very strong sentiment to buy the stock now.
Source: Genuine Impact
Decent debt control, not profitable, and not paying out any money. Extremely expensive to buy right now. High returns are priced in and expected. Poor future revenue, but extremely strong future earnings, and decent sentiment to buy the stock.
Source: Genuine Impact
A large Russian company where Yandex.Taxi is a small part of their business but I’ve included it due to the list being so short! High profitability, debt is extremely well covered and controlled, still not great at paying money out. Not as expensive to buy as the other two but larger firms tend to be worth less than the sum of their parts, due to poor synergies and optimisation. A very weak outlook for the future, not something the analysts think you should be even considering right now.
It’s pretty tough to find direct competitors which you can invest in. Most of the competitors are privately owned, and the other public ones are large firms like Yandex or car manufactures where it’s a smaller part of their business.
To help paint a picture, here is a landscape picture from an asset manager.
Source: GAM TaaS Is An Opportunity
Looking above where we covered off the different business lines, you can see the different areas of the TaaS landscape Lyft is trying to enter into.
What Are The Risks?
The biggest risk is, what if this isn’t the future trend we think it is? There is a big expectation that the future of car ownership is in decline. In the future we rent our transportation and see it as a commodity. Even companies like Tesla are working towards your Tesla working as a public taxi while you are not using it. The risk is, what if this graph is wrong.
Source: Statista Ride Hailing Taxies - User Growth
The prediction is more and more users will start ride hailing than ever before, and this is a year on year growth which won’t end.
Source: Statista Rie Hailing Taxies - Revenue Growth
Even accounting for COVID-19 we are expecting ongoing growth outpacing user growth, meaning we are using the services more and more.
The other big risk is the law. The gig economy as it stands today is being challenged. Right now Uber and Lyft are facing a legal battle in some US states to not classify the drivers as employees. This is a common trend around the world and one the taxi services are having to fight. On the side of the corporations is the growing number of gig worker market places available, e.g. Deliveroo, which would also be affected. While TaaS firm can repurpose their offering, this is a fundamental threat to their core services currently.
A sudden change in the law could result in years worth of setbacks.
Finally, on the point of law, is automation. Both Lyft and Uber are making automation bets, along with a few other notable companies like Tesla and Alphabet. If driverless cars are not given the freedom these firms are pushing for, it means these experiments stay in R&D for longer and keep burning cash.
For publicly listed companies they sure do behave like start-ups. Extremely high cash burn, need to be well funded which means more capital will likely be raised (plus aggressive acquisition strategies to fund,) creates a situation where a bad global pandemic could shake your business to the core.
Lyft has been forced to make some tough moves and laid off staff, as well as massively downgrading their 2020 plans and targets.
A sensitive, unknown, trend setting, cash consuming, non-profitable business. Some meaningful risks in a nutshell.
The Growth Plans
Which brings us back, with so many risks what are Lyft doing about it. What is the growth strategy?
Number one is to increase their use cases. Think about the transit business line which doesn’t generate any income. They want to become the go-to source for transportation, using their services or not. This also gives them the flexibility to move into a service provider and step away from delivering the service (think Amazon running a marketplace but they don’t manufacture the goods, well not always.)
Subscriptions are also a new feature they are working on. Produce regular predictable revenue and a loyal customer base to roll out new products and cross sell into.
Next up is the B2B angle again. Selling their logistics management solution to other fleets. Rather than digging for gold, sell the pickaxes. Another way to pivot the business or potentially expand it, depending on the climate.
Geographic expansion. Lyft is very small geographically speaking compared to many of their competitors. They are very focused, which is great for a very tailored experience, terrible for your market penetration outside of your home regions. Uber is burning cash getting themselves a very defensible market hold, Lyft is planning to start expanding as well.
Acquire more of the value chain. They brought Flexdrive which was their business partner for loaning cars to drivers. Lyft is not shy when it comes to M&A activity, they see this as a way to grow their business and completely control the experience from top to bottom. A smaller region focus means you can create strong synergies but replicating this round the world might be tougher.
What’s The Hook?
Looking through you might still be surprised I have this as a buy. The long term future looks like a challenge, and it’s not as impressive when it comes to fundamentals. What is the upside that has my attention?
Source: Genuine Impact
The future share price is what has me excited. Let me turn this rank into a tangible number for you.
Lyft is currently priced around $32 a share price right now, the medium sell-side analyst target price (target price is normally within the next 12 months) is $51 a share. This is a 60% increase.
With the general view being a buy, buy-hold, or hold. The analysts see a strong short term future after COVID-19. While there will be some struggles once the lockdown eases up, the growth strategy seems promising.
Source: Genuine Impact
Additionally there might be some short term wins to be had for Lyft over Uber.
Barclays analyst Ross Sandler expects a quicker recovery for Lyft than Uber because of its West Coast orientation, assuming West Coast cities reopen a few weeks before the eastern U.S. and Europe.
Let me know what you think, is now a good time to pickup Lyft and how does it stack up against Uber as an investment.
Thanks again everyone for the suggestions and readership!