Lyft’s IPO, analysis and implications

• Lyft IPO marking the formalisation of the shared economy
• Profitability is not a mandatory criterion for a successful IPO
• Lyft to benefit in the US market with a strong revenue visibility

At a driver centre in Los Angeles, Lyft’s co-founder John Zimmer and Logan Green rang the ‘Nasdaq opening bell’ in the early hours of Friday (29th Mar. 2019) and marked an important event in the global economy with the formalisation of the rise of sharing economy.

The no. 2 US ride-hailing firm became one of the most valuable American companies to go public in the past decade (valued at $22.4 billion at the end of first-day trading) above the internet peers like Expedia, TripAdvisor, Snap, etc. The 20 times oversubscribed stocks of Lyft rose as much as 23% on its debut and settled at 8.7% higher at the end of days close. The IPO price of $72 implied price to trailing-12 months sales multiple of 9.4x, significantly higher as compared to the median 5.8x of its peers. There are multiple factors not limited to strong sales growth expectations and a huge addressable market in the US, which drove the valuations higher than its peers.

The success of Lyft’s IPO is closely monitored by investors, with the likes of technology giants Uber Technologies Inc. as well as other silicon-valley unicorns like Pinterest Inc., Postmates Inc., Slack Technologies Inc., etc., which are looking to go public before the end of the year.

A horde of big technology firms such as Alibaba, Snap, Twitter, Facebook, etc. have gone public in the past decade. Most of them soared on the first day of trading on the back of a massive investor frenzy, resulting in a huge demand outstripping the supply. Notably, while these firms have experienced an exponential rise in their revenues, a majority of these made losses at the time of going public. Thus, we can see that being profitable is not a mandatory requirement for a successful IPO as we have also seen in the case of Lyft, as the losses mounted to $911 million (2018) from $688 million in the previous year, which was despite a doubling of revenue in 2018 to $2.16 billion.

Soon enough when the initial frenzy waned out many of these firms witnessed a decline in prices. Lyft also witnessed a slump in prices by 11.8% on the second day of trading and fell below the listing price. However, in the long run, Alibaba and Facebook’s share prices soared on the back of healthy revenue growth as well as profitable operation, Snap and Twitter have struggled to reach the IPO listing price levels.

Hence, the IPOs of Lyft and other loss-making unicorns present a predicament for investors, who do not want to miss out on the opportunity and want to be a part of popular companies with exponential growth potential, but they should also weigh on the risks of businesses with unproven economics (whether they will be able to make money and by what time).

Lyft’s high listing price reflects an increased appetite of investors. Furthermore, the company’s appeal to investors is hinged on the potential for ride sharing to replace car ownership in the long-run. The top line visibility of the firm has been solid owing to multiple factors as enumerated below.

1.       Huge addressable market: ridesharing is a large addressable market in the US, with a long runway and the potential to replace car ownership, taking the opportunity to a trillion dollar. Further, Lyft is a formidable name in this market and hence, is perfectly poised to gain from this opportunity.

2.       Brand image: Lyft has a strong brand image in the US that has strengthened its market share and driver/rider retention, which is reflected in its rising take rate as well as a 30% growth in the revenue per active rider.

3.       Improved monetisation:  the take rate increased from 18% (2016) to 27% (2018), reflecting a lower rate of subsidies offered to drivers/riders as the company focused on monetisation from its user base and improved driver utilisation. The revenue per active rider doubled in past two years to $36 (2018) even while it scaled back on discounts and promotional rides indicating that the rider churn has not been too much of an issue. Further, Lyft has concentrated in the US market where the average price per ride is higher as compared with the rest of the world.

4.       Gaining market share: due to its better brand image among riders and drivers, it has gained market share at the behest of Uber in the US from 22% (2016) to 39% (2018). Hence, with the growing market share and broadening of its partner ecosystem, Lyft can look into other online mobility service offerings such as food delivery, freight and logistics as well its expansion globally. Moreover, the company is looking at possibilities for autonomous vehicles to reduce its operating costs.

5.       Steadily expanding smartphone user base: both the smartphone user penetration and Lyft app download percentage have increased in the past two years resulting in increased ridership for the company.

6.       Recurring revenue from subscription model: it offers monthly all-access subscription plan aimed at boosting recurring revenue and which is also offered in order to drive monthly active users. This should see a faster adoption in cities where ride sharing is emerging as a cheaper alternative to car-ownership.

While the company has strong revenue visibility, its lengthy road to positive free cash flow is hampered by a high-cost structure vis-à-vis its peers (other tech companies). The elevated administrative expenses arising from regulatory scrutiny of driver wages, contingency losses (tied to collision coverage for damages) and lawsuits, as well as high insurance costs (it has to comply with different regulators’ requirement across various cities), puts a dent on its road to achieving a positive cash flow. Although various initiatives like reduction of sales and marketing expenses, lowering of incentives, discounts and in-time increasing ride revenue per active user will help achieve the goal of profitability.

Though Lyft and Uber have been expanding rapidly, they have lost around $1 billion a year. Additionally, the companies are spending heavily on new initiatives like food delivery, autonomous vehicles, making profits a distant dream for these players. However, the successful launch of IPO for Lyft provides a stepping stone for other tech giants, which are looking to go public this year. At present, the investors are focused on the growth and hence have increased their risk appetite. In addition, the companies which are going public are much bigger and mature, which provides more comfort to investors. Only time will tell how these companies will fare in the long-run. As of now investors are bullish on these companies and have welcomed them with open arms.