Lyft IPO breakdown

Update: we’ve added Lyft onto the app! Grab it here.

Here’s their story.

In one of the most exciting public offerings in the last few years, Lyft are set to file for an IPO, possibly as early as next week. This will be the first ride-share platform to go public and further the pressure on competitor mega-decacorn, Uber, to match them later this year.

Who are they?

Lyft are an American ride-sharing app, based in San Francisco and operating in North America.

It was started by Logan Green and John Zimmer in 2012 as a spinoff of a long distance ridesharing business they launched in 2007.

The company tries to emphasise casualness and a laidback friendliness between driver and rider: ride-sharing, rather than an app-based taxi service.

The actual model doesn’t differ much from Uber or any of the other taxi apps, but the brand and the experience are differentiators.

Think of them as cuddly Uber.

Look at these guys - they’re adorable. Or they’ve been carefully polished to look adorable.

What do they do?

Currently operating in 300 cities across USA and Canada only, Lyft provide a car-booking platform and consumer-facing app that links a force of self-employed drivers to an audience of ride-hungry passengers.

They also offer a scooter and bike-sharing service, with an 80% market share for bike-sharing in the US.

The numeros

Lyft

Uber

If Lyft IPO’s at $20B, their value would be 13 times their revenue, On a projected $120B valuation, Uber has a slightly cheaper multiple (10.6x).

Of course, we’re operating in the loss-making world of ride-share apps, where big revenue somehow brings its own challenges.

Both companies historically and currently rack up huge losses: $1.8B for Uber and hundreds of millions for Lyft in 2018.

Here are some of the big pros and cons for Lyft as an investment proposition:

Good brand

As above, one of Lyft’s best assets is their relatively benign reputation.

While Uber has fame and scale, they’ve also faced multiple public backlashes, due to corporate culture, safety scandals and the management style and character of ex-CEO Travis Kalanick. It’s one of the most controversial brands in tech.

Meanwhile, Lyft are seen as friendly and relaxed. They were the main beneficiaries of the Delete Uber movement that began after Uber maintained airport service during a protest of the Trump administration’s travel ban.

This seems like quite a soft advantage, but in a market with very little product differentiation, brand is important.

Space to grow

Lyft haven’t left North America yet. New markets are expensive and there are already multiple competitors in most developed markets. However, apart from China’s DiDi, Lyft have the most credibility, visibility and resources of any other Uber rival and could do well competing with an unloved Uber.

They’ve been poking around Europe for a couple of years and opened an office in Munich last year. Tougher European regulations and the prospect of expensive price wars have stalled them for now, however.

Regulatory risk

While Lyft may not raise the hackles of public authorities in the same way as the cocky Uber, the models and their regulatory implications are basically the same. Lyft has also faced run-ins and debates with city authorities, though nowhere near as many as Uber.

While Lyft may benefit from specific sanctions against Uber, a blanket regulation on ride-sharing would harm them both.

Competitive market

Despite how magical it would have seemed to have cabs on demand from your smartphone, the ride-sharing market has some of the lowest barriers to entry, as evidenced by the swarm of Uber clones in pretty much every territory.

  1. The technology

The technology is incredibly duplicatable; this is clear from the many, many local iterations. A ride-sharing app’s reliability seems to be largely based on how many drivers are in the network, rather than unique tech.

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Uber investor, David Sacks’ take on this (from Twitter)

  1. The capital

Outside the operations and running the tech platform, the main capital for a ridesharing app is basically its drivers and cars. Of course, they don’t directly pay for this, at least in most cases (sometimes the platforms lease vehicles to drivers). However, the lack of capital risk is a double-edged sword.

The contractor model for drivers means that while platforms like Lyft don’t have the liability and direct expense of full employees, they also don’t have any loyalty or consistency.

This means most drivers use every app in their market and flip between them based on pay-outs and demand from passengers. The more apps, the less bargaining power for any one app. This also means any new entry to the market already has a labour force ready and waiting to bring onto their app.

Consumers can also be fickle - where there’s choice between ride-sharers, they’ll choose the cheapest.

All this competition drives down already negative margins.

Which brings us to:

Can it make money?

The fundamental question: Do ride-sharers work as a profitable businesses without huge cash subsidies from VCs?

Especially in an incredibly open market, where the only thing new rivals need to enter the market is their own VC cash-pile.

A lot of commentators have interrogated whether the ride-sharing model can ever be profitable in its current iteration.

The unit economics are lousy, because you’re providing an effectively luxury product (chauffeur service whenever you want it) at a low cost. Lyft and Uber have burnt a lot of VC cash maintaining this artificially affordable luxury. The classic metaphor is burning 2 dollars to make 1.

However, a few possible paths to profitability have been touted:

  • Scale
  • Ancillary services
  • Driverless cars

Scale only helps a loss-making business if it drives costs down or allows you to charge more. Ride-sharing apps don’t benefit from obvious natural economies of scale like a manufacturer might. So scale only helps if you can achieve monopoly and use the lack of competition to charge what you like from passengers and pay what you like to drivers.

A monopoly doesn’t look likely for Uber, let alone Lyft.

So, unless that changes, more scale could just mean more losses.

Ancillary services has been one of Uber’s main pitches to investors for a robust business. This means expansion into other mobility services like:

  • Food delivery
  • Couriering
  • Bikes and scooters

The difficulty here is that some of these services are also loss-generating, albeit at a lower level.

Lyft have pursued bike and scooter networks and their acquisition of Motivate could give them a reported 80% of the US bike-sharing market.

Driverless cars are the major hope for the profitability pivot. This does remove a major cost (the driver) and possibly transform the economics of ride-sharing. Sorry, driver! You can get a job in… erm, where did all the jobs go?

Lyft have thrown their hat into the ring for driverless tech, bolstered by the acquisition of an AR startup last year. They seem to be making similar progress to everyone else - which is to say: promising trial programs, no solid plans for mainstream adoption yet.

However, it’s a very busy ring, with Google, Nvidia, Tesla, any number of AI and AR startups, Uber and big car companies all working hard to crack this market.

These questions remain anyone’s guess:

  1. Who will dominate driverless tech and capture the resulting value?
  2. Will it cut costs enough for ride-sharing platforms to prosper?

To wrap up

If you wanted to get exposure to the ride-sharing sector, Lyft could be an interesting opporunity. At $20B, Lyft seems to have more headroom for growth than a potentially $120B Uber and while they don’t have much international presence, that also leaves them with places to go.

Everyone knows Uber is useful and Uber but nicer is a compelling consumer proposition. Lyft lacks some of the influence, service lines and resources of Uber, but they also dodge a lot of their problems.

Their diversification into friendlier mobility solutions like bikes and scooters are more regulator-friendly and financially lower stakes than, say, Uber’s spin-off into another highly unprofitable, controversial industry with Uber Eats.

Wait, what if we burn 4 dollars to make 2 dollars!

The fundamental question isn’t about Lyft in particular but the ride-sharing sector in general. If you’re sceptical, Lyft don’t have a lot of reasons to change your mind.

If you believe that the model can work - with or without driverless cars - Lyft might be interesting.


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Would probably be more interested in this than Uber, far more interesting valuation than Uber’s potential 100-120bn mkt cap!

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We had a topic about the Lyft IPO already so I’ve been a bit cheeky & moved the 2 above posts over to here, to keep all of the discussion in one place.

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How can we, as UK investors, get involved with investing in Lyft? Sounds like an interesting proposition but pity its not a deal that I’ve encountered in my usual start up deal flow

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Lyft isn’t public yet so their shares aren’t available to purchase via a stock exchange. But hopefully we’ll be able to add them to the app soon after they complete their Initial Public Offering, later this year :grinning:

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@Toby this is an amazing write up. Props, bro! :clap:t3:

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Great post! My thoughts:

  • Is Lyft’s opportunity to close the gap to Uber now disappearing? (now that Uber is some way into its brand rebuild under new leadership)
  • It looks like ridesharing is a series of separate, winner-take-all territories: the network effect from building both sides of the market is local rather than global (see Uber’s difficulties in China, India etc). Does this affect their prospects and their investability?
  • They both need to get further into micromobility - bikeshare, scootershare etc
  • Google is way ahead of the self-driving competition and is invested in Lyft. This may be a future counterbalance to Uber’s current size advantage.
  • (Er, note to self: discussing rideshare as if it were a two company market is very oversimplifying.)
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I wouldn’t touch these two with a 20 foot stick. They have been in business for quite some time and and are still burning through cash like there is no tomorrow. Looks a lot like the dot com bubble to me. Might be wrong , but I see much bigger downside than an upside here.

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That’s pretty much my thoughts on it.

The valuations are ridiculous for what is basically an app that lets you hail an unregulated taxi, They don’t have any amazing technical innovations or patents that can’t be copied.

a $120bn valuation would put uber at 1/6 the size of Apple. Think about that for a minute…

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Loving the debate here - personally I probably wouldn’t invest (not advice), although I might end up being in a trust or ETF that does.

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Agree with both your and @Dave’s comments. Nick Srnicek wrote some excellent analysis on this:

Just like the earlier dot-com boom, growth in the lean platform sector is premised on expectations of future profits rather than on actual profits…Until these firms achieve monopoly status, their profitability appears to be generated solely by the removal of costs and the lowering of wages…Far from representing the future of work or that of the economy, these models seem likely to fall apart in the coming years.

Come back to me when they have a working fleet of autonomous vehicles. Until then I wish the best of luck to (only) Lyft.

I guess their ‘moat’ here is reaching scale. As the image that we included in the OP from David Sacks shows, they’re banking on being able to offer lower prices vs new entrants once they have the best geographic coverage / saturation, in order to maintain their dominance of the market.

Have you spotted any flaws in that model by any chance?

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To be fair, this is how almost every high growth tech company works - they burn cash to gain market share & then become profitable later, through increasing prices &/or adding more revenue generating services.

My intuition is that there was also an opportunity for these companies because they’re competing against monopolies with artificially high prices in some countries.

For example, in New York, you can only drive a taxi if you have a medallion. Since too few medallion’s were issued, demand was greater than supply, enabling taxis to charge more than they could have if there were more taxis on the road. The ride sharing companies provided those extra taxis & could undercut the incumbents while still making money & paying driver’s wages. Subsidisation was also key initially but that may only be necessary to achieve market dominance.

You can also imagine ride sharing services being more efficient as rather than a car driving around hoping to come across someone who needs a ride, the ride sharing taxis are being called directly to the rider’s location.

The TL;DR is there may be a mid point between the prices that the incumbents were charging & prices that make providing a taxi service unprofitable / unsustainable, where the ride sharing companies could sit?

As you say, autonomous vehicles will be a game changer too though, it’s going to be very interesting to see how they shake things up - when they do.

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My issue is not necessarily that their model is flawed, It’s more that a huge amount of success is already priced into the valuation, they could be very successful, but unless they become dominant the valuation still isn’t really justified.

And so far they haven’t even made a profit, never mind world domination

This makes them very vulnerable to a huge share price crash on any bad news or missed expectations

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*DPI is Distribution to Paid-In, it is a measure of the cumulative investment returned to the investor relative to invested capital.

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Looking at Lyft from a slightly different metric

Of course $96 million is only part of the story. They’d also have other cloud services, from productivity, to development.

I wonder if the $8m per/month for AWS includes any discount, and whether Google will offer a discount to signup the company they’ve invested in away.

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Great share @saf. Most interesting and I noticed some affinities with our own approach to cloud: https://blog.freetrade.io/why-we-use-serverless-architecture-at-freetrade-e668c7bf5d42

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