Lyft’s IPO Filing Should Frighten Investors And Infuriate Drivers
Last week, Lyft beat Uber to the IPO starting line by filing its S-1 registration with the SEC. The document provides a first detailed look at audited financial statements for the operational and financial performance of a major rideshare provider over the past three years.
Reactions in the business press have been decidedly mixed, with headlines ranging from “Lyft’s IPO Filing Shows Revenue Nearly Doubled in Q4 While Loss Rose Slightly” to “Lyft’s Risk Factors Are the Stuff of IPO Dreams — Bad Ones.”
My take on the numbers buried in Lyft’s 272-page S-1 document is that Lyft’s path to profitability seems murkier than ever, and drivers should rightfully be concerned that Lyft will be pressured to further squeeze their stagnant earnings.
The root cause of Lyft’s continued heavy losses remains the structural weaknesses in its ridesharing business model. As I noted in a previous Forbes article addressing “Why Can’t Uber Make Money?,”ridesharing companies face bounded demand, abundant supply, undifferentiated service, low barriers to entry, low customer switching costs, high variable costs, virtually no economies of scale, limited network effects and considerable regulatory and legal risk.
The net effect is that while Uber and Lyft have created enormous value for consumers, propelling rapid growth, the ridesharing business model simply doesn’t generate enough profit to enable attractive compensation to drivers and sizable profits to shareholders. Lyft’s IPO filing corroborates this reality.
1. Lyft’s revenue per ride has doubled over the past three years, while driver compensation has remained flat Faced with chronic losses, Lyft has clearly been under pressure to increase revenues and control costs, starting with driver compensation — by far its largest single expense item. Despite succeeding on both fronts, Lyft’s year-on-year operating losses grew by 38% in 2018 to $978 million.
As shown in Exhibit 2, Lyft:
Increased bookings per ride by 15%, mostly through price and fee increases
Doubled revenue per ride
Slightly decreased driver compensation per ride
Halved sales and marketing expense per ride
Lyft’s S-1 thus confirms what drivers have suspected for years,– that the company has been keeping an increasingly higher proportion of passenger fares and fees at the expense of drivers. During this period, Lyft switched to a new (“upfront”) pricing policy, increased fixed booking fees and imposed minimum passenger fare levels, effectively decoupling passenger pricing from driver mileage and time rate-based compensation. The net result allowed Lyft to increase its revenue per ride from $1.92 in Q1 2016 to $3.75 in Q4 2018, while driver compensation per ride slightly decreased from $9.49 per ride to $9.32 over the same period.
Note that Lyft has considerably decreased its per-ride outlays on sales and marketing over the past three years, which includes recruitment incentives and driver bonuses. As such, driver compensation relative to Lyft revenue may have become even more disadvantaged than indicated above.
2. Lyft experiences limited economies of scale, constraining its ability to narrow losses
Despite impressive growth in ridership and revenue, Lyft’s net losses have continued to rise. The reason is that operating costs remain considerably above revenues, and the absence of scale economies prevents the company from scaling efficiently. As shown in Exhibit 3, Uber lost 45 cents per dollar of revenue in 2018. And despite doubling its revenues last year, major operating costs increased at roughly the same rate (Exhibit 4). Given the company has been in business for over six years and is already operating at considerable scale, it is unlikely that further growth will fundamentally improve Lyft’s economics.
3. The Lyft-initiated current price war with Uber is likely to take a toll on Lyft’s post-IPO profitability
Starting last month, Lyft sharply ramped up discounts to one-third of its customers in anticipation of its IPO. While discount rates vary by location, in my neck of the woods (Connecticut), the promotion offered a 25% base fare reduction for up to ten trips per month (capping the price cut to $4 per ride). Given that Lyft’s average revenue per ride was only about $3.50 last year, offering $4 discount coupons to a large bloc of consumers can be expected to take a heavy toll on the company’s already shaky P&L. If the intent is to gain market share bragging rights during its IPO roadshow, Lyft’s tactic may allow the company to cross the 40% US market share threshold against Uber. Better yet, the P&L hit won’t have to be disclosed until after Lyft’s IPO. Nonetheless, experience with past price wars in this sector has proved quite harmful to profitability.
Summing it up
Lyft continues to post heavy losses, reflecting weaknesses in its underlying business model and relentless competition from a bigger rival. While Lyft has narrowed its losses in percent of revenue (if not absolute) terms, this largely reflects the company’s ability over the past three years to nearly double its revenue per ride, without any comparable increase in driver compensation. Looking forward, Lyft’s path to profitability will be severely challenged by:
Limits to how much farther it can continue to disproportionately capture future revenue gains at the expense of drivers
Slowing growth in the sector, escalating the frequency of promotional pricing skirmishes
Thin margins and stubbornly high operating costs, in the absence of strong scale economies
Little evidence that the addition of micro-mobility services will be accretive to profits
Growing regulatory risk in many major markets, likely to increase Lyft’s costs, cap growth or both
Several court challenges to Lyft’s practice of classifying drivers as contractors. An adverse, precedent-setting ruling could significantly increase Lyft’s costs and liabilities.
While it is common practice for companies to be highly conservative in identifying risk factors in their S-1 filings, Lyft’s self-assessment may be chillingly accurate in this instance.
“We have a history of net losses and we may not be able to achieve or maintain profitability in the future.” — Lyft S-1 Registration Statement, page 21