The recently announced $20+ billion Lyft valuation is, I believe, failing to account for recent developments in NYC, a very large and historically higher margin market, which, I believe, accounts for ~10% of Lyft’s total revenue and even more of its contribution margin (Lyft’s term for gross profit).
A recent minimum wage law, new NYC ride surcharge and a ‘Uber/Lyft’ vehicle cap, threatens not only growth in the NYC market, but will also likely compress Lyft’s NYC margins. The main and immediate impact, I believe, will be from the recently passed NYC minimum wage law, as it now increasingly appears the law is unlikely to be undone.
I believe the pressure on Lyft’s NYC business warrants a $500m – $1bn valuation discount, which is conservatively derived by discounting 1/2 of the current value one could associate with Lyft’s NYC business (5x-10x sales multiple on ~$200m of 2018 NYC sales (details of this sales estimate can be found below)). I believe this is conservative due to (1) Lyft’s NYC profit model historically being more lucrative versus other cities and (2) NYC being a high volume growth market where the app-based ‘rideshare’ market continues to grow tremendously – increasing from 554k rides per day in Dec 2017 to almost 700k rides per day by the end of 2018.
Lyft’s NYC Business
At the beginning of its S-1, Lyft dedicates one full page to this graphic, which highlights how diversified its rideshare business has become.
Source: Lyft S-1
Surely, after reading this, logic would dictate Lyft’s business is not overly reliant on any one city. However, New York City could be considered an exception (this btw is not even accounting for the NYC-related revenue from its Motivate bike sharing division it acquired in November 2018)
Without getting into the details of NYC’s rideshare industry (and I hesitate to use ‘rideshare’ as it is more a professional black car market in NYC), I would like to focus on two conclusions I reached and provide evidence backing up my claims / estimates.
- Lyft made ~$200m of revenue from its NYC rideshare business
- Lyft historically had a higher contribution margin in NYC rideshare and a stable 20% market share, but both will likely suffer under new NYC rules & regulations.
Lyft made ~$200m of revenue in ‘NYC Rideshare’
Let’s get right to the data disclosed on a monthly basis by NYC Open Data.
Source: NYC Open Data
We can see that Lyft likely logged about ~45 million rides in NYC alone in 2018 and has grown / cemented a ~20% share of the market.
Recently, there was reporting from Quartz and Crain’s that local NYC App rival, Juno, was pitching itself to potential buyers with the following figures.
- TTM Jan 2018 Gross Billings: $270m
- TTM Jan 2018 Net Revenue: $40m (Juno, however, is known to charge only ~15% commission in NYC)
- TTM Jan 2018 Total Trips: 14 million
The only thing we can essentially sense check is the ‘Total Trips’ figure of 14 million and based on NYC Open Data, it is exactly in line with disclosure (per the table above). So let’s build our assumptions using these disclosed figures from Juno’s NYC business and see if we can come up with an estimate for Lyft’s NYC rideshare business:
Source: Quartz, Hudson Far West estimates
Using this methodology it appears Lyft made ~$200m in revenue from its NYC rideshare business alone or ~10% of Lyft’s total business!
Lyft historically had higher gross profit margins in NYC rideshare
As discussed in my SeekingAlpha note Lyft – Insurance And The Path To Profitability, 50%+ of Lyft’s cost of revenue line appears to be related to insurance. However, since NYC is the only US market, to my knowledge, where Uber and Lyft don’t pay for rideshare insurance it follows the contribution margin should be much higher in NYC.
In fact, if we were to eliminate the 50%+ of ‘insurance-related cost of revenues’ it would imply Lyft’s NYC business had a ~70% contribution margin (note: pre-minimum wage being implemented in Feb 2019) on the revenue it made in New York City, or ~$145m in 2018. This would imply Lyft NYC may have accounted for ~16% of Lyft’s total contribution margin in 2018!
Source: Lyft S-1, Hudson Far West estimates
However, both Lyft’s NYC market share and margins will likely suffer under new NYC rules & regulations
However, Lyft (note: in its own disclosure) believes its NYC business will suffer due to the specific way in which NYC forces the rideshare apps to calculate the minimum wage, which favors higher ‘utilization rates’ or how busy a driver is kept. Lyft in fact details this complaint and is suing NYC over the new minimum wage calculation, stating the rule unfairly advantages Uber.
In a blog post published on March 16th, Lyft interestingly gave more specifics on the impact the new NYC minimum wage law is having stating:
“When the TLC’s rules went into effect in early February, we saw their negative impact on driver earnings and took action to stabilize the market largely through the use of passenger discounts. We won’t do this forever, but knew it was important for both the driver community and Lyft while the lawsuit progressed.
Looking at the two days we did not stabilize the market, compared to the same two days in the prior week, shows a significant impact from the rules: Passenger prices increased 24%. Rides dropped 26%, and in turn, driver earnings dropped 15%.”
Clearly, if the total NYC market is growing, but Lyft ridership is dropping (without increased fares completely making up for the offset) it implies it is losing market share.
Furthermore, according to Quartz:
“In a separate affidavit also filed March 12, Lyft general manager for New York and New Jersey Ann Ferracane said Lyft raised ride prices to comply with the new pay rates and had since seen a “significant decrease” in the frequency of passengers requesting rides and total rides in the market.Ferracane previously estimated it would cost Lyft an additional $2.3 to $2.5 million per week to comply with the taxi commission rules, depending how they were implemented.”
In other words, the estimated contribution margin from Lyft’s NYC business is likely to drop tremendously ($120m+ in additional annual costs), which will start hitting Lyft’s financials shortly and may be variable in nature (i.e. costs are not fixed, but rather tied to a trip).
Conclusion
- Lyft’s NYC business has recently come under pressure and all indications are it will remain challenged throughout 2019 and maybe beyond
- Given Lyft’s NYC business accounts for ~$200m of Lyft’s revenue and ~$145m of its contribution margin, I believe a valuation discount is in order to account for this new risk to the business
