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Lyft: A Bubble That Could End Worse Than An End – Lyft, Inc. (NASDAQ: LYFT)



LYFT's failed IPO

In my view, Lyft (NASDAQ: LYFT) had one of the worst IPOs I've seen since the Facebook IPO (NASDAQ: FB), if you look at the trading perspective , Before the IPO, the company initially positioned itself in a price range of 62 to 68 USD. However, they increased this to $ 72. This initially signaled high demand for the IPO. Initially, the stock reached a high of $ 88.60, up ~ 23% from the IPO. During the day, the stock began to decline. It fell to a closing price of $ 78.29, a drop of ~ 12% from the daily highs. This may indicate that demand slowed during the day.

On the second trading day, the stock fell to a closing price of $ 69.01, a decrease of ~ 12%. The extent to which Lyft shares have fallen has triggered fears about the success of the IPO. For Luit's business, the IPO was a success, adding $ 2.34 billion to its existing $ 518 million cash balance. This means that Lyft's liquidity stack should reach US $ 2.858 billion after the IPO, providing a cushion of funding to offset potential heavy losses. For shareholders who made the purchase after the IPO, success was the last word that came to my mind. The tenacity of the price decline signaled a weak initial demand after the IPO. Lyft reminds me after the flotation on Facebook. While Lyft's IPO was not as uncertain as that of Facebook, the controversy was directed at both sides.

A weak initial demand for Lyft's initial public offering could signal a mixed / negative investor sentiment and negatively impact the stock as a catalyst (such as earnings reports). arise. Coupled with reports from early investor Carl Icahn, who sold his stock, there could be a period of heightened investor uncertainty and heightened volatility.

The Only Reason to Buy Stock: Growth

The Only Reason Anyone Really Considers Buying Lyft shares at ~ $ 70 is the company's perceived growth potential. In the fourth quarter, Lyft recorded sales growth of ~ 94% yoy, an increase of ~ 48% in active drivers and ~ 53% yoy overall. These numbers are all impressive, but the most relevant numbers you should observe are the following:

  • Active drivers
  • Total number of trips
  • Sales per active driver
  • Sales per trip

These four data points help platform metering and how well monetization of the platform is progressing. Let's start with active drivers.

The first measure in Lyft's growth analysis is how quickly Lyft increases its driver base. In recent years, Lyft has not only expanded internationally, but also invested a lot in consolidating itself at home. That makes sense. After all, platforms such as Uber (UBER) and Lyft are subject to increasing regulatory review due to numerous practices. In some international areas, platforms such as Lyft and Uber have been completely banned. Why expand into a turbulent international market when there is plenty of domestic space to grow? Let's look at the growth of Lyft's drivers.



(Source: DA Davidson, Company Information)

Lyft continues to increase at least one million users per quarter. However, the Y / Y comparisons begin to deteriorate. In the fourth quarter of 2017, Lyft improved its number of drivers by 6 million, an increase of 90%. In the fourth quarter of 2018 Lyft increased its number of drivers by (again) 6 million drivers, an increase of 48% . The growth of the drivers starts to slow down. However, this can be misleading as Lyft continues to add more than one million drivers.

The problem with Lyft is that I believe that Lyft's growth will stagnate in the longer term. Lyft made abundantly clear in his S-1 SEC filing that she expected no profitability in the coming years. So if investors buy Lyft, they buy it for the next 5-10 years, not the next 12-18 months. The problem is, you have to bet that rideshares become mainstream and not just a niche part of the transportation market. Could carpool become mainstream? It could be over 5 years. There are some issues that can limit the growth of the driver. First, the call for carpooling could be located in extremely urbanized areas such as New York City or Los Angeles, where the cost of owning and using a car is not ideal.

Overcrowded cities and high car prices make taxis and platforms such as Lyft and Uber increasingly ideal. Your mainstream mission still needs to be proven. In less urban areas and even in rural areas, Lyft's acceptance is less likely. However, optimists like Citron Research have found that the trend is real. They point to the following data points:

  • 16-year-old US drivers with driving licenses dropped from 46% in 1983 to 26% in 2016.
  • In 2018, ~ 300K Lyft customers have unleashed their car. [19659019] As far as the first point is concerned, there is no direct relationship between carpooling and new driving license registrations. Lyft was founded in 2012. Uber was founded in 2009. The cause of the decrease in the ride-in is naive. Ridesharing has gained great popularity only in recent years.

    As for the second argument, this simply proves my point of view that ride-sharing is a niche, which is especially true in extreme cities where buying a car does not mean so much an option. Let's put this 300K number in context with the overall base. Only ~ 1.6% of Lyft's driver base has left their cars. While the customers of Lyft are less and less dependent on their car, the ride-in program does not replace the cars. These 300,000 customers are most likely customers from areas such as San Francisco, Los Angeles, New York and Washington DC.

    Another issue that I want to address has to do with the cultural barrier in the US of not owning cars. An important measure for the socioeconomic ascent (together with the home) is the ownership of a car. While younger generations will use Lyft and Uber more often, it is unlikely that US consumer cultural dynamics will move so viciously towards a center-centered transportation industry. In my opinion, carpooling will be a niche market, unless the expectation is a total culture of nearly "180".

    The next part of the "growth cake" is the idea of ​​increasing monetization. Lyft's positive business model is the company's ability to generate recurring revenue. In contrast to traditional, established car manufacturers, Lyft focuses more on customer loyalty. When an automaker sells a car, its economic goal is to move to a new consumer instead of ensuring the quality of the consumer who has just bought it. Lyft is unique. Transportation, be it the daily commute to work or shopping, is always recurring. As a result, Lyft is able to generate recurring revenue as long as Lyft's customers travel across the Lyft platform.

    As the following graph shows, Lyft continues to make progress in monetizing its platform:



    (Source: DA Davidson, Company Data)

    Lyft continues to maintain strong ARPU growth (average revenue per user) of 20 to 30 years (average revenue per user) as drivers become less dependent on their own vehicles and become increasingly less dependent on carpools such as Lyft and Uber. The company's ability to sustain solid ARPU growth is impressive. However, as with the counter-growth of the driver, the monetization headwind can harm the company in the longer term.

    Consider Lyft's revenue per trip.

    Revenues Revenues Revenue per Carriage
    Q4 & 2018 ] $ 669.57 million 178.4 million $ 3.75 (+ 27% y / y)
    Q4 & # 39; 2017 344.64 million 116.3 mln [19456520] $ 2.96 [196590] At the end of the day earning platforms like Uber and Lyft money with rides, not with drivers. Let's hypothetically assume that the price (revenue per trip) only increased by 27% compared to the previous year. With 178.4 million trips, this represents revenue of $ 528.06 million, up 53% year-on-year. If we include price growth back into the equation, we will see growth of 94% yoy. Without increased pricing, Lyft's revenue growth would be significantly lower than its reported 94%. In the longer term, I believe revenue per trip will stagnate or even decline.

    There are several reasons for this belief. First, the carpooling market is highly competitive, even in its current duopolism. Second, autonomous driving leads to unavoidable cost reductions per trip. Let's take a closer look.

    Competition and the relevance of the network effect

    Despite the duopoly nature of the rideshare market, Lyft's only true competitor is currently a fierce one. First let's look at why the market is currently a duopoly. I like to think that the ridesharing market is built on network effects. While the relevance of the network effect applies primarily to social media platforms, I think it's just as important, if not more important, to ride with you. Let's look first at the definition of a network effect:

    A phenomenon in which a product or service becomes more valuable as the number of people grows.

    Lyft only earns money when an economic transaction takes place between a driver and a driver. Lyft then receives a "take rate", usually 30% of the transaction value. This is the main source of income for Lyft. For Lyft to receive a takeover rate for a transaction, however, there must be an underlying transaction. The platform is built on drivers who drive for a fee. As the number of available rides increases (due to an increase in riders), it is more likely that a ride will be purchased. It is necessary to have more drivers in the network and more popularity than the competition in order to maintain market share and maintain the current revenue rates of 30%.

    There are far more drivers working on the Uber platform than on the Lyft platform. In addition, Uber riders earn more money with Uber than Lyft riders on Lyft. While this adds value to Lyft, the difference between Lyft and Uber prices is miniscule and negligible for most riders. As Uber has more riders on the platform, Uber drivers have less to wait for driving and more flexibility and customization in terms of what they drive.

    Uber uses its large network to leverage its drivers and maintain its high market share through Lyft. At the end of the day, Uber has nothing concrete (other than network effects) to distinguish itself from competitors like Lyft. The rest of the competitive advantages are intangible assets such as the brand. However, Lyft and Uber are not fashion companies, smartphone manufacturers or car manufacturers. These are rideshare services where the relevance of the brand is less likely to affect customers.

    Basically, Lyft has nothing really unique about its platform. One thing a company can do to keep the competition out is to lower prices. However, the price reductions will reduce Lyft's gross profit margins, making profitability even more difficult to achieve than it already is.

    Overall, Lyft is due to the current Mitfahrwettbewerb Lyft in a difficult place. If it ultimately wants to become a profitable company, a price cut is not an option. If it wants to expand its customer base, then price cuts may be one of the only options it has.

    Work, Insurance and International Expansion

    Another important set of problems with the Lyft operating model is the classification of labor and insurance costs associated with it. This could affect their ability to penetrate other international markets.

    Lyft regards his driver as a general contractor and not as a paid employee. Therefore, Lyft does not tend to union work, minimum wage or benefits / insurance. This could be one of the most important elements of Lyft's bear work. While media focus on social media regulation, rideshares could be the more controversial business model. The biggest problem with the way Lyft recognizes its drivers is the fact that Lyft drivers are more likely to be considered prime contractors rather than paid employees. While this lowers the cost of the business model, it carries several risks.

    I believe that Lyft's current business model is broken, as there is no way (without autonomous driving) to profitability. The business model of Lyft could be even more damaged if they are forced to employ their "general contractor" drivers as salaried employees. It is well known that Lyft and Uber's drivers work well below a living wage far below the minimum wage. When booking these persons as general contractor, however, Lyft does not have to stipulate a salary. If these drivers were to become paid employees of Lyft, as some regulators in the US and abroad have urged for it, Lyft would have to raise wages to the minimum wage, cover higher benefits, insurance, etc.

    One of the unique carpool business model states that the platform (Lyft, Uber, etc.) makes the drivers independent of the platform. Some international and domestic regulators have argued that Lyft and Uber drivers do not earn a living or even minimum wage. They believe that Lyft should cease these "contractors" to receive a living wage for them. Lyft also has to deal with the fact that carpooling marks the beginning of the end of the taxi age. As the number of taxi drivers still exceeds the number of Lyft / Uber drivers, the taxi drivers were greatly disturbed by the popularity of Lyft and Uber.

    Overall, Lyft could be under pressure to hire Lyft drivers as employees. This could lead to an even greater increase in operating expenses and increase profitability even further.

    The next edition of Lyft concerns the accounting of insurance costs. While most drivers use their own vehicles for the service, Lyft itself is responsible for the insurance of the vehicle and the passengers inside the vehicle. You post these insurance costs below the cost of goods sold in the income statement. Lyft inherits the risk of accidents with drivers directly in his books.

    The last and possibly most relevant question builds on my previous point regarding Lyft's potential work problems. My point is Lyft's ability to expand internationally. As I have already outlined in my article, driving a car could be a niche market as investors believe. Although this could be a pretty niche, it is unlikely that this will be the megatrend that Lyft Bulls are hoping for. If anything, driving may be limited to very urban areas where owning and operating a car is not feasible, and riding a much more sensible and convenient option.

    In my opinion, barriers to entry are far greater in international markets than in the domestic markets of the United States and Canada. On the one hand, international regulators are more inclined to see US companies enter their markets. This was one of the main reasons for Uber's withdrawal from China and other international markets in Asia. In addition to the regulatory overhang, there is local competition. In China, for example, Didi is the biggest competitor. In Southeast Asia, GrabTaxi is one of the biggest players. The lack of awareness of the brand in international markets makes it difficult to use Uber or Lyft. It really depends on network effects in every single economy. Since replacing Travis Kalanick, Uber has strategically moved away from international markets to focus on safer, more developed domestic markets. Lyft's mission is to be local, with international expansion left to Uber. As Uber tumbles, they will focus more on the US market and affect Lyft's growth prospects.

    Autonomous Driving

    In my opinion, Lyft's only path to profitability is solid use of autonomous driving in its carpool network. There are two approaches that Lyft can adopt in autonomous driving:

    • Software Developer
    • Software Consumer

    The first approach is to develop Lyft's proprietary autonomous driving software and / or hardware technology use throughout the fleet. For example, they could buy vehicles from other automakers, install the necessary software and / or hardware in the vehicle, and add them to the fleet. The most important thing is the idea that Lyft develops its own software for autonomous driving. In the long run, this will prevent Lyft from having to outsource its autonomous driving software requirements, which will cut costs. From what I've seen, Lyft is trying to develop its own autonomous driving software. Without becoming too technical, the autonomous driving software improves with more experience. This "experience" stands for data. As the amount of data increases, the software becomes more accurate and powerful.

    What platforms with rides like Uber and Lyft have to their advantage is their ability to use miles driven on their platform to enhance autonomous software. Lyft and Uber have hard data that could be beneficial in the long run compared to platforms like Waymo that have far less actionable data. The problem is that software for autonomous driving is extremely competitive. For example, let's take a look at Tesla (NASDAQ: TSLA).

    On April 22, Tesla will hold an event dedicated to autonomy investor focused exclusively on autonomous driving. Tesla has set ambitious (to say the least) goals for the progress of its autonomous driving software. However, Elon Musk has made it clear that Tesla is preparing for long-term competition with Lyft and Uber. [194559061]

    (Source: Electrek)

    Tesla is in my opinion a unique participant in the market for autonomous driving. All newly produced Tesla's are manufactured with autonomous driving hardware, with semi-autonomous software available for a fee. Tesla is able to use autonomous miles to make improvements to its software. Lyft and Uber, on the other hand, because such a small portion of their total mileage is semi-autonomous (if available), they have less leverage. Outside of Tesla, competitors such as Waymo (NASDAQ: Jag) (NASDAQ: WelfL) and GM (NYSE: GM) are market leaders. There are dozens of companies dedicated to autonomous driving in the future. Many of these companies (Tesla, GM, Uber, Alphabet) have much more capital and resources to devote to autonomous driving technology.

    Put simply, Lyft's competition is ahead of them. If Lyft wants to compete, they need access to much more capital and more talent. At this point, Lyft is a laggard in autonomous driving. If autonomous driving is Lyft's only real path to profitability, even if autonomous driving is lagging behind the competition: will the company ever be profitable?

    Uber's Initial Public Offering, Voting Structure, Staggering Appraisal

    There are three final points that I would like to address when it comes to Lyft about my Bearenthesis. Uber's IPO, Lyft's stock selection structure and Lyft's insane rating.

    Let's start with Uber's IPO. As I mentioned earlier and include the current pricing measures, Lyft's trading after the IPO was subpar, to say the least. This lack of sound trading activity could be compounded by a strong IPO by rival Uber. Uber has already submitted its S-1 and is preparing for an IPO. It is unclear whether Uber will start trading in April or May or not, but I think a Uber IPO could affect Lite's trade. In general, I believe (and I'm not the only one) that Uber's business model and its stock are less risky than Lyft. The business is much larger and has a much better economic base than Lyft. Thus, institutional money from Lyft can flow in the direction of his "bigger sibling" Uber. This could lead to an increase in the demand for shares in craters, as Lyft still has to gain a material retail chain. As a demand crater, prices are falling. If anything, Uber's IPO will do more harm than good to Lyft's price action.

    Next, I'm skeptical of a new topic among the new IPOs introduced by companies like Facebook. The dual stock structure allows founders / management to have far more control over the company than public shareholders. Founders do so by issuing "Founder-Exclusive" or Management Exclusive Private Supervoting stock. These shares enable the company's management teams and / or founders to control the company's business almost directly, regardless of what the A-share shareholders have to say. Again, this is not as big a problem for Lyft as for new IPOs. I think Lyft's stock structure was better than a few IPOs before, in my opinion. It simply is not an ideal voting structure for new shareholders.

    After all, anyone who reads my content knows that, from my point of view, rating is one of the most important aspects in analyzing a business. For the most part, I have discounted cash flow models in the companies I cover. However, due to the lack of profitability and the path to profitability, I will not use a DCF model for Lyft. In fact, I will not set a price target for the stock. As Lyft is currently the only publicly traded corporation on the market, it is also difficult to make a relative assessment. Per Nasdaq Lyft has an outstanding number of shares of 273,597,091. With a closing price of $ 59.90, Lyft's valuation is $ 16.142 billion. With sales of $ 2.156 billion in 2018, Lyft's current valuation is ~ 7.5X. Does Lyft still earn 7.5x the revenue from all the issues described in this article? I let you decide.

    Lyft: A Dot Com Era Tech Bubble? The Next Snap?

    In my opinion, Lyft's trade will be catastrophic over the next few years as the road begins to come true. Lyft is a FOMO title (fear of staying away). While optimists believe the company will expand and grow into a new rating, there is still significant headwinds that make such a rally extremely difficult. I would like to pass the readers on to the Snap Card (NYSE: SNAP). That's how Lyft could look in the next few years.

      Chart

    Data from YCharts

    This could be another snap. If anything, Lyft may be longer than Snap.

    Disclosure: I am / we are long FB, General Manager, TSLA. I wrote this article myself, and it expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.

    Additional Information: At this time I do not have a short position in LYFT shares. However, in the next 72 hours, I can take a short position in the form of put options. My initiation of such a position depends on the price action.


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