IPOs are a pivot point for companies and investors. The prospectus is really the last time management has full control over their narrative before cold-eyed investors begin to have their say. As a result IPO prospectuses have become more breathless over the years about a company’s idealism and world-changing business plans. Lyft’s continues this tradition. In its prospectus, Lyft management frames its business as an endeavor to “improve people’s lives” and “revolutionize” transport with help from management that is “visionary.” It may be all that. But once Lyft goes public, it’s going to be viewed in light of its core business: transportation. There have already been some good deep dives into Lyft’s prospectus that don’t need repeating. What does Lyft’s reported goal of a $25 billion market capitalization say about its relative valuation?
* Lyft probably values itself at more than the U.S. ride industry as a whole.
Lyft (and Uber) were great first movers in pushing the taxi industry to evolve. Until about five years ago, the industry was dominated by medallion owners who had little incentive to improve service – the inexplicably timed yellow cab shift change from 4pm to 5pm in New York City rush hour is an example of an industry unresponsive to market need. Lyft and Uber deserve tremendous credit for cracking the medallion market open. But how significant is that market? The peak of the taxi industry was 2013, when the price of medallions peaked at about $1.3 million a piece in New York, with lower peaks reached in the next largest taxi markets of Chicago, Boston and Newark. Using medallions as a proxy for the value of the taxi market before Lyft and Uber started making significant inroads in 2014, the industry was worth $21 billion in all of the U.S. in 2013 according to the annual report of Medallion Financial Corp., a publicly traded company with a long-standing business owning and leasing out taxi medallions.
That seems about right, given that more recently, based on average ride and total ride data in the 2018 New York City Taxi & Limousine Commission fact book, all car rides – taxis and cars-for-hire – grossed $4.75 billion in the Big Apple, the largest ride market in the country. It’s worth evaluating that with the low barriers to entry Lyft helped create how much market share the company can reasonably capture and retain. Lyft says it had 39% of the ride market in December, but that’s defined as just them and Uber. There’s arguably some market share ride services can grab from mass transit, but expect people who opt for Lyft over mass transit to be highly sensitive to an economic downturn, since the time-cost value of ride services doesn’t make great economical sense, as CityLab explains.
* Lyft would be worth than all but two major airlines.
At $25 billion, Lyft would have a market cap trailing only Delta Air Lines and Southwest Airlines, based on data compiled by the New York Times. Delta has 180 million annual passengers, Southwest carries 120 million. Lyft in the fourth quarter 2019 says it had 18.6 million riders, which is 74.4 million annualized. Delta’s gross margin is 20.9%, Southwest’s is 25.6%, according to data from Gurufocus.com. Lyft keeps about 29 cents of every dollar its drivers collect, arguably a proxy for gross margin as a columnist for Dow Jones contends. But in reality, that’s before other costs that should be counted toward gross margin, such as Lyft’s own marketing, administrative and overhead costs, as TheStreet.com notes. Air travel is a commoditized business, but airlines have higher barriers to entry that give them some margin advantage, from limited landing slots established airlines already control to the high cost of leasing planes.
* The market hasn’t rewarded existing taxi stocks.
With IPOs, you always want to see what comparable publicly traded businesses are valued at. This is a hard with Lyft. Russia’s Yandex is the only publicly traded stock with a similar car-ride business. It’s traded on the Nasdaq and its market cap is $11.5 billion. At first blush, not a bad comp for Lyft, since you should apply a significant discount for country risk to a Russia-based company. But while car-ride revenue surged almost 300% for Yandex in fiscal 2018 , it was just 15% of its overall revenue – Yandex is foremost a Russian language search engine. The jump in taxi revenue came from a merger of Russian business with Uber a little over a year ago. Yandex’s shares are a little lower than they were eight years ago, when it launched its ride sharing business. Meanwhile, Medallion Financial isn’t a great comp, because its business is really a niche lender model and its medallion assets have been decimated by Lyft and Uber. The value of a New York medallion is about one quarter what it was about five years ago. Its market cap is around $160 million, half of its peak in late 2013.
You can make your own decisions about Lyft’s value as an investment. I’d caution that great companies don’t make for a great stock, and an innovative reworking of a traditional business could very well be another Netflix in the making. Or it could be another Groupon.