Steering Lyft’s IPO: What Investors Will Weigh During the Roadshow

Xconomy San Francisco — 

Much has been said about Lyft’s early lead over Uber in the “horserace” to become the first ride-hailing app company to go public. But now that San Francisco-based Lyft has filed its 276-page IPO prospectus with the U.S. Securities and Exchange Commission, potential investors can focus on much more detailed considerations as they decide whether to make bets on the smaller of the two U.S. ride-hailing leaders. Lyft’s IPO roadshow, during which it will make pitches to stock market investors and analysts, may begin as early as March 18.

Lyft is one of the companies that best illustrate the cultural shift that IPO candidates navigate when they leave the Silicon Valley venture capital support system that fueled their early growth, and seek capital instead from Wall Street investors who may judge the company by a whole different set of standards. Will Lyft’s proposal fly with them?

One automotive industry analyst says Lyft’s filing brought no new answers to a key question: How will the company turn a profit?

“Lyft is the first transportation-as-a-services company to have an IPO, but in terms of service offerings and defining a new path forward—that is unchanged, apart from having stockholders to answer to,” says Valerie Sathe Brugeman, the Center for Automotive Research’s senior project manager for the Ann Arbor, MI-based organization’s transportation systems analysis group. “One thing Lyft has going for it? It’s ubiquitous. People rely on [it]. The service itself is not going away anytime soon.”

Like Uber, Lyft is recording big losses as it continues to grow, and its path to profitability is uncertain. Some analysts, not surprisingly, have declared that pattern unsustainable in the long-term.  The bright spots: Both revenue and market share have risen significantly over the past two years, but that’s no guarantee that Lyft’s financial numbers will ever flip into the black.

Lyft’s revenue rose from about $343.3 million in 2016 to nearly $1.1 billion in 2017—a 209 percent hike. In 2018, revenue was nearly $2.2 billion—another year-over-year bump of 103 percent. But while the revenue growth rate was slowing in 2018, the company’s losses were accelerating, rising from $688.3 million in 2017 to $911.3 million in 2018. The company’s revenue amounted to 26.8 percent of its $8 billion in bookings for 2018.

Here are some of the factors that may inspire Wall Street investors to depart from the judgment of venture capital firms, which often prize growth over shareholder profits and thrive on risk as they bet on the future.

Profitability

Silicon Valley VCs don’t need their portfolio companies to achieve profitability in order to make a return on their investments: the VCs get their financial reward when the portfolio company goes public, or when it’s acquired by another business. By contrast, investors in public companies—such as pension funds with retirees to support—want to see profits and a rise in share values, which often correlate with financial performance.

Lyft acknowledges in its IPO filing that it may never reach profitability, while simultaneously struggling to present a clear path to financial solvency. However, the sheer size of the transportation market—the prospectus valued it at $1.2 trillion annually as of 2017 in the U.S. alone—suggests a big opportunity.

Without offering assurances that its plans will lead to profitability, Lyft says it will continue to pursue growth in its rider base, its geographic territories, and its roster of drivers. This will come by means such as discounts for new riders, and more expenditures on marketing. Lyft, which operates in the United States and Canada, has already boosted its market share in those countries  from 22 percent in December 2016 to 39 percent in December 2018. But some of that jump may be the result of an expensive commercial push as the company prepared for its IPO. The total amount Lyft spent on sales and marketing leapt from $567 million in 2017 to $803.7 million in 2018, according to its IPO filing.

Lyft identifies some other routes to progress: By capturing masses of data about rides and routes, the company says, it can continue to improve the efficiency of its platform in scheduling trips, which would benefit both riders and drivers. The company also believes that its total market will increase because car ownership will decline as consumers realize that it’s more expensive than on-demand ride services—and this trend will be more pronounced among digital-native millennials.

Also, like Uber, Lyft is starting to build out its platform as a one-stop app where riders can plan all stages of a trip, by linking to bike and scooter rentals as well as public transit options. All this could lead to higher business volume for ride-hailing companies as a whole—but will it lead to profits for any of them?

Lyft continues to sound the credo of the “sharing economy,” saying it provides flexible opportunities for drivers to make money in their spare time. But the cost of constant recruitment of part-time non-employees must be factored into the company’s financial prospects. Investors may want to hear about the turnover rate for drivers, and ask for a … Next Page »

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