Virgin Trains' IPO Attempts To Ride Forces Unleashed By Uber, Lyft

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About: Virgin Trains USA (VTUS)
by: SharesPost
Summary

Virgin Trains is the first unicorn to file to go public this year. The company wants to raise $467.8 million at a valuation of $3 billion.

The company wants to build and operate high speed passenger train service between major cities, including Miami-Orlando and Los Angeles-Las Vegas.

Virgin Trains hopes to capitalize on the success of ride-hailing firms like Uber and Lyft, which can connect cities to regional rail stations.

Uber (UBER) and Lyft (LYFT) are undoubtedly the most anticipated IPOs of the year. But another unicorn that recently filed to go public might intrigue investors interested in ground transportation of a more traditional scope.

Virgin Trains (VTUS) recently said it plans to raise $467.8 million from selling shares at $18 per share, giving it a $3 billion valuation. The company is actually the first business to file for an IPO since the federal government reopened last month following the longest shutdown in U.S. history.

Virgin Trains may not be a typical high-tech unicorn, but it certainly boasts Silicon Valley-esque ambition: to make passenger rail service an attractive business again in America. The company is already constructing a high-speed train line between Miami and Orlando in Florida and plans to do the same for Los Angeles to Las Vegas.

The company, which is licensing the Virgin brand, is independent of Virgin Hyperloop One, a unicorn that’s developing technology that allows trains to travel through high speed tubes.

Virgin Trains notes in its S-1 filing that it will be the new major private passenger intercity railroad in the United States in over a century. There’s a good reason for that. Since the emergence of automobiles, interstate highways, and passenger jets, rail travel has significantly declined in this country, though trains remain hugely popular in Europe.

If rail service sounds kind of retro, the forces driving Virgin Trains’ vision is decidedly 21st century: growth of large cities, traffic congestion, climate change concern, and, most importantly, on-demand taxi service from a large network of freelance drivers.

“The recent emergence of rideshare services, such as Uber and Lyft, facilitate the use of passenger rail service by providing transport to and from rail stations, which we refer to as ‘first and last mile connectivity,’” Virgin Trains said in documents filed with the Securities and Exchange Commission. “These trends are expected to continue given the increasing roadway congestion, safety and environmental impact concerns as well as the cost-savings that riders often experience using rideshare services compared to driving a personal car.”

Can rail service be profitable?

Given the cost of building out infrastructure like rail lines, signals, and stations, a publicly-traded passenger rail company doesn’t sound like it could generate lots of profits. Amtrak provides most passenger rail service in the United States, but the quasi public organization has struggled financially and heavily relies on federal and state subsidies to survive. From 2007 to 2012, Amtrak's annual operating losses ranged between $373 million and $469 million. Last year, however, the organization narrowed its annual operating loss to $168 million.

But in its SEC filings, Virgin Trains said it will focus on high traffic inter-city corridors stretching 200-300 miles and build around existing infrastructure.

“We intend to target markets where we believe we can utilize existing transportation corridors – either rail, highway or a combination of both – to cost effectively build our systems, as opposed to developing entirely new corridors at potentially significantly higher costs,” Virgin Train’s prospectus said.

Virgin Trains estimates it will generate about $1.673 billion after one year of stabilized operations for each if its two planned lines: Tampa Bay/Orlando to Miami will carry 9.5 million passengers and generate $810 million and Los Angeles to Las Vegas will attract 11.3 million riders and generate $863 million, the company said.

Virgin Trains is also eyeing Houston to Dallas, St. Louis to Chicago, and Portland-Seattle-Vancouver. Most notably, in a direct challenge to Amtrak’s Acela line, the company is targeting Boston-New York-Washington DC, the busiest traffic corridor in the country.

A key part of “seamless mobility”

Virgin Trains doesn’t just see itself as a separate train company, but rather as a component of an integrated major metro transportation system consulting firm McKinsey & Co. calls “seamless mobility.”

The world is experiencing a major popular shift to cities and large metropolitan areas. The United Nations estimates that 68 percent of the world’s population will reside in cities by 2050, compared to 55 percent last year. Moreover, the UN thinks over 40 “mega cities” (populations of 10 million each or more) will emerge over the next decade.

Such big migrations will strain cities' resources unless countries invest in the necessary infrastructure, including transportation, housing, and energy, and services to absorb this population growth.

A major problem in urban transportation is the lack of coordination between the private and public sectors over supply and demand. The rising popularity of Uber and Lyft, for example, will just add more cars to already congested highways.

McKinsey thinks the private and public sectors need to work together to build integrated transportation systems that rely on smart technology. For example, commuters take autonomous, electric-powered trains, shuttles, and buses into city cores. For the “last mile” of any commute, they can transfer to e-scooters and bicycles, conveniently located near major transit centers. For people who still prefer cars, they can order self-driving robo taxis which travel down dedicated lanes on roads and highways, aided by “smart” traffic lights to efficiently direct vehicles.

Virgin Trains apparently sees itself as the link between two major metropolitan areas, thanks in part to ride-hailing firms like Uber and Lyft that can connect urban cores and suburbs alike to regional rail stations.

“Growing travel demand, aging infrastructure and significant restrictions on the ability to expand roadways all contribute to increased roadway congestion in many areas of the United States,” the company said. “We believe our business represents a scalable model for twenty-first century passenger travel in North America. Our goal is to build railroad systems in North America that connect major metropolitan areas with significant traffic and congestion.”

If anything, Virgin Trains' emergence shows that Uber and Lyft can positively impact other industries beyond ride-hailing if the company can coordinate its efforts with federal and state regulators and other tech firms. Investors might pay attention to those opportunities, especially companies that focus on mass transit, autonomous vehicles, and Internet of Things software.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.