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Lyft Looks Like a Hot Mess

There’s been plenty written about the Lyft IPO (NASDAQ: LYFT) scheduled to price Thursday after the close and open for trading on Friday. Most of the commentary has been about whether or not the Lyft has the ability to make money and if so, what the margins might be. We did include a valuation section at the end here just as a guide.

The Hot Mess

Numbers aside there are a number of challenges Lyft will face as a public company that will keep us on the sidelines of this one:

  1. Q2 results could be weaker than expected. A lot of drivers work for both Lyft and Uber. They will tell you it’s a must if you want to survive in the business. Drivers know that IPO bonuses are based on the number of rides they have so now they have an extra incentive to ramp up Uber rides to qualify for that bonus and the clock is ticking.
  2. Multi-modal is just a story. This term refers to using multiple modes of transportation to make a trip. The base case is using a short-leg at the beginning to connect with mass transit and then another short-leg at the end to connect to your final destination. It can also get more complicated when you factor in commercial travel options. Lyft pictures doing this in all kinds of use cases including some involving bikes and scooters. They are not even close to having anything working in a practical sense. I don’t believe the company even knows how hard this problem will be to solve, let alone pull it off. During the 1980’s I worked on this problem with companies including IBM, Union Pacific Railroad, Maersk and American Airlines. It’s almost intractable.
  3. Scooters and bikes are shaky prospects. Most people who live in a city have witnessed the sudden proliferation of electric scooters from companies like Bird and Lime. But in many places they have become a running joke as drunken, helmetless customers joyride them around on sidewalks and against traffic. The real question though is can this mode of transportation be profitable at the current pricing – nobody knows. There’s a reason bike-sharing programs are sponsored by big companies and run by municipalities – they don’t need to be profitable and provide investors with a high return.

These are the challenges the company faces at the same time they will also be transitioning to the intense pressure of being a public company with quarterly reporting and increased accountability with respect to their execution.

The Plus Side & Valuation

Don’t get the wrong idea – we like Lyft as a service and a company and there are several positive aspects to the investment story: As noted in our first Lyft post they have enjoyed strong bookings growth, proven that they can take share in the market, have a huge market opportunity, and a P&L that, while still making major losses, is making forward progress.

A big IPO like Lyft doesn’t really hinge on valuation. There’s too much that is unknowable to put really fine points on margins and multiples. But let’s walk through it:

Simple Simon: In some markets, the easiest methods work the best. For Lyft it works like this – at the mid-point, the valuation 9x trailing sales. Sales are growing rapidly and could reach $3.5B this year. Putting the same multiple on it gets you to $31.5B and $108/share.

Quick PFV: We’ve been using something we now call “Present Future Value” for about 20 years and it works very well for high growth technology companies. It’s time-consuming so for many deals we use a simplified version we call the QuickPFV. It’s been almost as accurate when we’ve used it for names like Elastic (ESTC) and Google (GOOG). However major assumptions have to be made and this makes the results harder to rely upon. FWIW here is our QuickPFV for Lyft:

Note that’s not far off the listing price so perhaps there is some truth in it. But that truth rests on a hand-waving operating margin of 15% that is just dropped in. How will that be built?

A full PFV is hard to do for Lyft, especially because we didn’t get to attend the meetings Lyft management hosts with their banking analysts to give them more information than the public will ever see. Still, we have done it based on what we know and can project. As you can see below our model doesn’t have the company hitting profitability until 2024. No doubt they will be reporting other numbers like contribution margin and adjusted EBITDA to investors. But we like to base our models on eventual net operating income. Here’s our full PFV model that we will update as Lyft makes progress as a public company.

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