The Lyft IPO's Most Crucial Details

Mar. 12, 2019 9:04 PM ETLyft, Inc. (LYFT)GM5 Comments
Euan Jones profile picture
Euan Jones
382 Followers

Summary

  • Autonomous Vehicle Technology.
  • Why Lyft is ultimately a risky investment.
  • Lyft is clearly betting heavily on autonomous vehicle technology.

After months of anticipation, Lyft (NASDAQ:LYFT) has finally publicly released its S-1 report, revealing key financial details that experts could only guess at before. While we do not know yet how much Lyft plans to raise nor its planned valuation, $20 billion has been commonly tossed about as an expected market cap for the ride-sharing company. Mashable reported in late February that we can expect Lyft to go public around March 18, but we could also see the company delay until April.

The S-1 report is an important document to determine whether this will be a worthwhile investment. Here are some of the key numbers and statements, as well as an explanation for why Lyft is ultimately a risky investment which I would tell most people to avoid.

$911 million

That above number is the single most compelling statistic against Lyft. It represents the company's net loss in 2018, up from $688 million in 2017 and $682 million in 2016. Lyft is not just unprofitable. It is losing nearly a billion dollars per year, and its losses have increased over the past three years.

That Lyft is massively unprofitable is not news. Investors have known for years that the company is attempting to grow its way into profitability, and it is good to see that revenue rose from $343 million in 2016 to $2.15 billion in 2018. But the magnitude of Lyft’s losses is staggering, especially when combined with other problematic numbers.

For example, the company also reported “negative cash flows from operations of $280.7 million for the year ended December 31, 2018,” as well as an accumulated deficit of $2.9 billion. Given its cash reserves on hand, as well as the fact that Lyft will not be profitable anytime soon, it appears likely that the company will need to do another offering at some point in the next few years just to stay profitable.

Lyft can point to an increasing number of riders and revenue, but that is completely overshadowed by the fact that it appears that the company will not be making a profit for years. Fortune even points out that a section of this report related to tax accounting indicates that Lyft may not expect to make money for another 11 years.

“Autonomous Vehicle Technology”

CNN Business argued last week that the Lyft IPO “is a pure bet on the US ride-sharing market,” in contrast to Uber (UBER), which is expanding into areas such as freight and food delivery. That may be true in the short term, which is not a good thing for Lyft, as Uber’s food delivery business is one of the more attractive parts of that company. But in the long term, Lyft is clearly betting heavily on autonomous vehicle technology.

Lyft claims that it is using a two-pronged strategy to bring autonomous vehicles to the market. It uses an “Open Platform” which provides market-leading developers of autonomous vehicle technology access to Lyft’s platform and rides. Furthermore, Lyft is building its own autonomous vehicle system. The company spent $300 million on research & development in 2018, up from $64 million in 2016, and indicated that much of this spending is on autonomous vehicle development.

If self-driving cars become ubiquitous, it could be the game changer which finally makes Lyft profitable, as it would no longer need to pay drivers. But there are two concerns.

First, people should be more skeptical about the hype surrounding autonomous vehicles. Level 5 autonomous vehicles, the technical term for vehicles which would need no human assistance under any circumstances, is realistically decades away, not years.

A more realistic approach is that a car may be able to drive itself under most conditions, but a human will still need to be at the wheel to handle difficult circumstances such as bad weather or unexpected obstacles. This means that Lyft will still need to pay for a driver, and autonomous vehicles will carry other expenses which regular cars will not, such as monitoring equipment.

Second, there is no guarantee that Lyft will be the main beneficiaries of Level 5 vehicles, even if they are just a few years away. The company may be spending money on autonomous vehicular development, but the main leaders in the field have been car manufacturers like Ford (F) or General Motors (GM), or other tech companies like Google (GOOG, GOOGL). These competitors could create a ride-sharing autonomous fleet of their own, which would make Lyft obsolete.

Lyft can point to its relationship with GM, which holds more than 5% of Lyft stock and had announced a strategic alliance to create an integrated network of on-demand autonomous vehicles in the U.S. But that partnership has become icier over the past year, and General Motors would be the one holding the keys in any such relationship. It is far easier to create another ride-sharing app than a new autonomous vehicle.

Look Elsewhere

There are additional concerns besides those listed above. Politicians, especially those in the rising Democratic Party, which has been ambivalent at best towards ride-sharing, could enact further regulations against Lyft. The company may continue to fail to grow, especially if the U.S. economy takes a downturn as many predict. And of course, there is the problem of how Lyft will compete against Uber, though Lyft has done a good job on this front and avoided many of the scandals and controversies affecting its larger competitor.

But the two biggest strikes against Lyft is that there is no indication this company will become profitable anytime soon, and that its promises of becoming profitable through autonomous vehicles are overblown. IPOs are tricky investments at the best of times, with their stock often falling in value a few months afterwards once the lock-up period expires. If you are really interested in Lyft, that will be a better time to invest. But I would argue that it is better to stay away from this company altogether given its many flaws.

This article was written by

Euan Jones profile picture
382 Followers
Evan Jones is an investment writer and a graduate of the University of Exeter. He has a degree in Economics and Finance and has previously worked as a communications manager at Deloitte. He has expertise in equity products as well as experience managing assets on New York stock exchanges on behalf of financial institutions, pension funds, government agencies and retail investors.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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