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Need a Lyft? A closer look at Silicon Valley’s latest offering

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On 29th March, 2019, Lyft became the first ride-hailing, publicly traded company. Shares were priced at $72 at the upper end of the pricing range. It was one of the highly anticipated IPOs to come out of Silicon Valley for 2019 and was oversubscribed in no time.

On its first day, the company raised $2.3 billion by selling 32.5 million shares. Trading commenced on the Nasdaq at $86.70 (20% above the IPO) before pulling back to $78.29 by the end of the day (8.7% increase from IPO price).

The stock was sold under a dual structure where the founders would hold Class B shares at a ratio of 5:1 allowing them to hold on to 50% share-holdership or a majority for the retaining voting controls.

   2016 2017 2018
Revenues  $          343.3  $       1,100.0  $       2,200.0
COGS  $           279.0  $           659.5  $        1,200.0
Gross Profit  $             64.3  $          400.3  $          913.2
Selling & Marketing Expense  $           434.3  $           567.0  $           803.8
R&D Expense  $             64.7  $           136.6  $           300.8
General & Admin Expenses  $           160.0  $           221.4  $           447.9
Operating Expenses  $           756.9  $        1,100.0  $        1,900.0
EBIT  $        (692.6)  $       (708.3)  $       (977.7)
Interest Income  $               7.0  $             20.2  $             66.5
Income Taxes  $           401.0  $           556.0  $           738.0
Net Income  $        (682.8)  $       (688.3)  $       (911.3)

Market growth and penetration allowed for market growth amounting to 220% in 2017, which slowed to 100% in 2018. Competition comes from several avenues such as the numerous taxis available with just a phone call, not to mention the rise in popularity of autonomous vehicles, as well as other ride-sharing companies like Uber. Ride-sharing market entry for other ride-sharing companies might prove difficult as the requirements to compete on the same scale will be challenging to attain. Although Uber continues to dominate market share based on a wider customer base, Lyft is giving it a run for its money as it now has 39% market share based on the number of rides, an increase from 22% for 2016.

Continuing losses appeared daunting, but EBIT as a percentage of sales was improving year-on-year from (2.02%) in 2016, to (0.64%) in 2017 and then to (0.44%) in 2017. Earnings are therefore only now playing catch up with revenues.

Lyft has also been struggling with what some have called an unprofitable business model given that it currently subsidizes its rides and spends enormous amounts of money in promotions (around 60% in 2016). It successfully achieved a target of 8 billion bookings, and growth continues at an impressive rate of over 10% following a challenging period in 2015 when an investor offered to buy the company and the founders were advised that their best option was to accept the offer. This forced the owners to refocus the company and build its brand around a reputation for being more people-centric than Uber.

Accompanying this growth in bookings was an improvement in its Gross Profit Margin of 19%, 36% and 42% in 2016, 2017 and 2018 respectively.

Also of importance is the company’s cash flows in relation to its ability to pay dividends:

  2016 2017 2018
Net Income  $        (682.8)  $        (688.3)  $        (911.3)
Depreciation & Amortization  $           527.0  $        2,600.0  $      18,800.0
Accounts Payable  $             24.9  $             21.4  $          (40.8)
Cash from Operating Activities  $          (487.2)  $          (393.5)  $          (280.7)
Purchases of PP&E  $               8.8  $               7.5  $             68.7
Cash from Investing Activities  $          (407.9)  $          (991.4)  $       (1,000.0)
Cash from Financing Activities  $           775.4  $        2,000.0  $           852.2
Net change in cash  $        (119.6)  $          664.0  $        (472.4)

An upsurge in available financing allowed the company to realize positive cash flows in 2017; however this was utilized in 2017 with an increase in cash used for Investing Activities.

Post IPO cash was projected at $2.5 Bn.

Regardless of its negative operating cash flows, Lyft has never really had trouble raising funding:

DATE SHARES ISSUED SHARE PRICE AMOUNT RAISED ($Mn) Post Money Valuation ($Mn)
Seed Aug-11          6,063,921  $         0.23  $           1.4  $         11.5
Series A Sep-11          8,129,364  $         0.76  $           6.2  $         45.5
Series B Oct-12          7,067,771  $         2.10  $         14.9  $       147.7
Series C May-13        14,479,445  $         4.25  $         61.5  $       335.6
Series D Apr-14        24,674,543  $       10.13  $       250.0  $    1,100.0
Series E May-15        47,099,094  $       19.45  $       915.9  $    2,800.0
Series F Dec-15        37,328,893  $       26.79  $           1.0  $    5,400.0

From 2011 to 2015, Lyft has raised more than US$5 Bn from investors such as GM, Alibaba Group, Andreessen Horowitz, Didi, Fb Fund, Floodgate Fund, GSV Capital, Icahn Enterprises, Janus Capital Management, Ka Ventures, Mayfield Fund, Prince Alwaleed’s Kingdom Holdings Company, Rakuten, Tencent and Third Point Ventures.

Funding rounds continued:

– $148 Mn from Prince al Waleed bin Talal in February 2016

– $600 Mn from KKR in April 2016

– $1 Bn from Alphabet Inc in October 2017

– $500 Mn from Fidelity Management and Research Company in December 2017

– $600 Mn primarily from existing investors in June 2018 valuing the company at $15.1 Bn

Here’s what several pre-IPO analysts had to say:

1) Theta Equity Partners conducted an assessment based on the Customer Lifetime Value (CLV) based on customer retention (churn), rides per active customer, revenue per ride and a variable margin for a forecast of the company’s future cash flows and discounted it back to the present to give an estimation of fair value. Their conclusion was that “Lyft’s target valuation is not justified by their fundamentals under any practically realistic future state of the world. They offered a more optimistic scenario with a fair valuation of about $7 Bn, while their base case scenario implies a fair valuation of $4.5 Bn.

Most other analysts were a bit more optimistic:

2) Tom White of DA Davidson – Buy with a $75 price point.

“Our BUY rating reflects Lyft’s impressive recent US market share gains and momentum, the continued growth/expansion of the broader rating include uncertainty around Lyft’s long term margin ramp/profile, risks associated with its positioning in autonomous driving technology, and the fluid regulatory/legal landscape for the Ridesharing industry.”

3) Dan Ives of Wedbush – Neutral with a $80 price target.

“Lyft is an attractive name to own to play this transformative ridesharing market opportunity, however at levels above $80 we find it hard to be bullish on the name given the risk/reward we see for shares.”

Overall, Lyft faces several downside risks such as its losses, operating costs which rise on par with growth albeit at a reducing rate and having to face a significant amount of competition from Uber which currently dominates the market and while its market share is widening, the growth rate is also decreasing. Competition is also mounting from autonomous vehicles while the current rate of technology makes it difficult to predict the timing and extent of this new threat to market share.

Nevertheless, the founders and a lot of investors are firmly behind the company’s long and short term capabilities. The idea of ride-sharing is taking off with a great deal of enthusiasm causing expansion of the market size. Goldman Sach estimates that it will be approximately $285 Bn within the next 11 years.

However, to increase its competitiveness in the autonomous vehicle market, Lyft has been attempting to partner with existing players. In March 2018, they partnered with Magna International in order to begin R&D for future manufacturing in the autonomous vehicle market. By August 2018, 5,000 autonomous vehicle rides were successfully completed in Las Vegas.

The structure of the business model also makes market entry difficult as its profitability not only increases with volumes but is dependent upon the company’s achieving sufficient level/amount of density and availability of drivers. This will therefore be crucial for Lyft’s survival since it will need to continue throwing cash at promotional ventures to continue expanding until it achieves and exceeds its break-even point.

While Uber currently dominates the market, Lyft has been steadily gaining ground developing its brand, promoting itself as the kinder of the two. This has been attributable to the boosted growth rate over the past few years.

All in all, the overall sentiment appears to be that the IPO was overpriced in spite of being oversubscribed before even hitting the market; driven mainly by overheated demand and a premium that seems to now be inherent in Silicon Valley offerings. Its ability to live up to its valuation seems a bit overly optimistic, however interest in the IPO continued unabated.

After going public, Lyft’s shares dropped from $72 to $58.36. Two lawsuits were filed pertaining to the exaggeration of market share data and lack of disclosure regarding a recall of over 1,000 bikes in its ride sharing program, however the company has opted to remain silent on these matters. It is worth noting however, that this is not uncommon.

When Facebook went public in 2012, the stock price fell 19% in two days leading to class action lawsuits that cost the company more than $2.5 Bn. The competitive environment within which Facebook operates however, is significantly different than that of ride-sharing which is still comparatively new and dominated by one major player. Some might argue that the time to buy is at the bottom of the curve in order to maximize on returns however this also means taking on a lot more risk with a low probability of achieving significant earnings in the short term.

The company will likely remain in a tenuous position over the next few months. Lyft rushed its IPO to get an advantage on Uber and priced at the high end but managed to increase its valuation to over $20 Bn from $16 Bn mid last year. While it was advantageous for Lyft to issue its IPO first, Uber is set to go public within the next few weeks; an offering for which we are all “uber” excited!

“Here’s to the crazy ones.!

The rebels.

The troublemakers.

The round pegs in small holes.

The ones who see things differently…

Because the ones who are crazy enough to think they can change the world are the ones who do!”

  • Rob Siltaren

 

Let’s change the world!

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