Lyft (LYFT) went public as of March 29th, 2019 with much fanfare making it the first of the graduating unicorn class of 2019. The stock flew higher on the opening session closing the session up by nearly 9% with a closing price of $78.29. The company was able to price its shares at $68 and will raise appx. $2.2 billion from the IPO, which will recapitalize the balance sheet, diminishing the impact from cash burn.
On first impressions, Lyft’s market capitalization of $21.848B seems a bit generous, but given the company’s long-term growth runway, and the potential to improve total passenger figures, and the net revenue per passenger there’s actually a compelling growth thesis here. Lyft is nowhere near market saturation and despite indications that it’s growth rate is slowing, there’s still a reasonable likelihood that the firm can grow into its valuation.
Prior to the IPO, the company has burned a lot of cash to sustain its growth rate, which is (probably) why Lyft went public. If you can look past the insane financial losses of $682 million, $688 million and $911 million for FY’16, FY’17 and FY’18, the financial thesis hinges mostly on projected performance and profitability.
The company might not be profitable in the next couple fiscal years, but there’s certainly an indication that they can reduce financial losses over the next couple years and sustain its eye-popping growth figures. Furthermore, the duopoly-like structure between Uber and Lyft diminishes any meaningful prospect of competition as they continue to disrupt the yellow cab industry (which is well on its way to the grave).
Key business metrics you may have missed
The company’s growth narrative hinges on two things. The number of riders (passengers), and the amount they earn per active passenger. The amount they earn per passenger tends to increase over time, as usage of the ride sharing app tends to increase the more familiar the passenger becomes with the experience. Furthermore, even though car ownership trends remain mostly stable/constant in the United States, the use of Lyft even among pre-existing car owners has trended higher due to practical reasons, people leaving the bar (risk of DUI), or airline travel (upon leaving the airport you can either hail a cab or request a Lyft). Personally, I’d go with Lyft, and I tend to follow my own advice…
The alternative mode of transportation has increased in popularity over the years due to its competitive pricing, ease of use, and added functionality. It’s a better ridership experience, and so the growth in passenger ship will likely continue, as illustrated (below).
Source: Lyft S-1 filing
Active ridership has trended higher from 6.6 million at the end of FY’16 to 18.6 million riders at the end of FY’18. A tripling in total riders over the past 3-years, and this trend is likely to continue as more and more become familiar with the ride-hailing application.
The company’s growth in ridership will likely continue given the population demographics of the United States, and the prospect for further adoption in international markets. It’s not a very capital-intensive business model, and deployment into international markets depends on driver on-boarding, and app installs.
Source: Lyft S-1 filing
Revenue per user has trended higher in the three-year trailing period as well (doubled). So, not only are customers requesting more rides over time, the numbers of riders are set to increase exponentially. If anything, the RPR (revenue per rider) is trending much higher on a net-revenue basis (not factoring in the cost of compensating drivers) than many other per user models (including social networking and even video streaming), which is why the business is so attractive in comparison to various other internet-based models.
Source: Lyft S-1 filing
On average, passengers have increased the usage of the app by 266% over three-years (based on the 2015 base year), which implies that as the ridership ages, the number of times they request a ride will also correspondingly increase. This doesn’t even factor in the potential growth from charging passengers more money per ride, but that’s also another growth lever they can use to sustain revenue growth or improve profitability.
Lyft reported revenue of $2.156 billion in FY’18, which translates to a 10.12x sales multiple. Despite the high valuation, and the lack of profitability, it’s really the growth prospects of the business that makes the valuation tolerable.
Because non-profitable businesses are difficult to value, it’s likely to be more volatile like other tech companies following IPO, i.e. Amazon, Facebook, and etc. Despite the volatility, the ride-sharing business model is extremely attractive, because there’s a much higher ceiling to the amount that can be generated in terms of total revenue per active user, and it has enough wide-spread appeal to be adopted like social networking, or video streaming, for that matter.
On the downside, stocks tend to drop following IPO, and Lyft might not be any exception to this rule. However, on a significant drop, the stock is an extremely attractive buy. Heck, even without a drop, it’s still an attractive growth vehicle where investors could experience multi-bagger returns assuming these growth trends continue over the next five-years, and the company turns profitable.