Lyft (LYFT) is a ride-hailing service that utilizes a network of drivers, using their own vehicles, to transport customers to and from practically wherever they desire. Lyft has a planned IPO for March 18, according to a CNBC report, generating a lot of interest from potential investors. While another author touched upon Lyft’s worrisome financials, I want to look more into whether Lyft truly has a future. This pertains mostly to their work on autonomous vehicles as well as mounting competition in their field. Uber (UBER) is their largest competitor in the ride-hailing field, also making their own transition to the public market. However, companies such as Alphabet Inc.’s (NASDAQ:GOOG) (NASDAQ:GOOGL) Waymo and General Motors (NYSE:GM) seem increasingly more prepared to handle the future of ride-hailing services.
Lyft currently operates a fleet of 20 autonomous vehicles, but they are only made possible through their partnership with Aptiv (NYSE:APTV); Aptiv has a total fleet of 75 driverless cars (including those that Lyft uses). Lyft itself is very far behind many of its competitors, in terms of self-driving capabilities. The company still plans to eventually release a self-driving fleet of its own design, not one created for them by a partner, though company representatives won’t comment on when it will be ready.
By relying on a partner, Lyft is currently losing a large sum of potential income that it would be generating if it were its own fleet. A fleet of autonomous vehicles would be incredibly profitable because it can be operated with incredibly high margins. The margins are achieved by the lack of a driver - the largest portion of the cost of goods sold (COGS) in a traditional taxi. In terms of what exactly the profit margin is, there is no real information currently available, but an UberX driver makes $43.54 per hour on average, 54% of revenue earned on a drive (author calculations with data provided by ridester.com).
Although the margins will be high, splitting them is far from ideal and will lead to weaker financials for Lyft in the long run. I expect Lyft to be able to begin offering their ride-hailing service with the Aptiv fleet without anybody at the wheel by the end of 2020. To clarify, this doesn’t mean nationwide. It will likely begin in an area they have focused their testing in, similar to Waymo’s current situation.
Waymo began its testing of autonomous vehicles in 2009. Lyft hasn’t yet unleashed autonomous vehicles of their own design on the streets, further widening the gap between itself and Waymo. Waymo is currently miles ahead of the pack, literally, in terms of developing safe driverless technology. They have already gotten permission to operate a driverless fleet in a small area in California. This is distinctly different from any other company that has gotten permits to test in certain areas, like Lyft, because there is no one in the vehicle to intervene or record data as there are in Lyft vehicles. If Waymo experiences no setbacks in their California neighborhood, their chances of going nationwide by the end of 2020 seem quite good.
General Motors is also working on developing their self-driving fleet, revolving around their electric Chevy Bolt. Originally, General Motors anticipated to have their fleet available by the end of 2019, but now those plans aren’t looking as secure. Nonetheless, General Motors is still making great strides in autonomous driving, and was second behind Waymo in most miles driven without intervention. General Motors isn’t the only car manufacturer to throw their hat in the ring. Tesla (NASDAQ:TSLA) too is working on autonomy and has predicted that by the end of 2020, they will have complete autonomous driving.
One of the greatest advantages Elon Musk, CEO of Tesla, seemed to believe his company has, in terms of developing autonomous vehicles, is its sheer size. With over one billion miles driven on autopilot, Musk is confident that regulators will be more inclined to support Tesla due to their tendency to rely heavily on real results and not just those collected in simulations. Uber was making decent progress in their autonomous driving, but after one of their vehicles struck and killed a pedestrian, they halted all testing and only recently restarted at a much smaller scale.
Once all companies developing their autonomous driving systems have reached the market, Lyft will face their largest challenge. Firstly, there will be significantly more competitors in their market as a ride-hailing service. Waymo, General Motors, and Tesla are just a few of the companies working on creating an autonomous service. While Lyft already competes against a very large taxi industry and Uber, the majority of the companies working on creating an autonomous driving fleet do not currently offer a ride-hailing service.
This means that the size of the market is staying where it is, but there are significantly more competitors to take away from Lyft’s growth and business. Even if the other companies didn’t have advantages over Lyft to further boost them ahead in sales, the heightened competition will take away from Lyft’s possible revenue.
In terms of what advantages the competition has over Lyft, the largest one is price. Almost all companies, besides Tesla, developing their autonomous driving fleet, use LiDAR as a main component of their system. Unfortunately, LiDAR is very expensive, costing around $75,000, but Waymo was able to reduce the cost of their LiDAR by 90%. Waymo will be selling their LiDAR components, just not to competitors trying to enter the autonomous taxi market. But by creating a cheaper LiDAR system by 90%, Waymo will likely be able to offer a cheaper service than Lyft while maintaining higher margins.
If Lyft were to drop their price to match Waymo, their margins would take an even greater hit than they already have due to their partnership. Tesla doesn’t use LiDAR, so they’ve completely eliminated that cost. As a car manufacturer, Tesla and General Motors are also at an advantage in terms of cost, because they are able to obtain their vehicles for much less than Waymo or Lyft can. This would allow them to reduce their price and maintain high margins as well.
As a result, in order to maintain even a bit competitive, Lyft will be forced to sacrifice their margins even further upon the release of the autonomous fleets. Lyft will lose a large portion of their customer base, and struggle to add more customers as consumers explore cheaper options.
Lyft posted a revenue of $2.2 billion in 2018, while Uber generated $11.4 billion in revenue for 2018. Lyft is already below its competitor by quite a bit, once there are even more companies to compete with, Lyft’s position will continue to shrink. All companies working to develop autonomous vehicles are also working to provide a ride-hailing service with them. As a result, Lyft’s revenue will continue to fall, and even as they become profitable with the eventual release of their autonomous vehicles, their reach will be far fewer.
With current annual revenue of $2.2 billion, I expect it to drop to $1.35 billion by the end of 2020, 61.36% of what it currently is. This is due to the increased competition causing less people to choose Lyft as their ride-hailing provider. As I discussed above, the competition will force Lyft to not only lose their customer base, but also lower their rates, if they want to remain competitive, so with lowered rates and less customers, Lyft will see a significant drop in revenue.
For this not to happen, the current autonomous endeavors would need to fail, but with Waymo already achieving success in their small California area, the failure of the investment thesis seems even less probable. Even if Lyft is able to beat all of the other companies to the market, besides Waymo, they will eventually make it to the market and then begin to take away Lyft’s revenue. This would just result in a delay in the thesis’ timetable, but would not prevent it. It is worth noting, however, that their profits will likely increase as a result of their autonomous driving, but since its revenue will be decreasing, while it is expected to increase, this means that their profit estimates are higher than they should be.
Their current valuation seems to be built off of their current reach increasing and future profitability. Although I do expect Lyft to become profitable, primarily as a result of their autonomous service, I do not believe that it will be enough to justify their valuation. IPOs tend to generate a lot of hype around companies, but in this case, it is not warranted. The positive sentiment may last for a couple of months, but reality is bound to strike eventually. Lyft seems to present a strong short opportunity as a result of mounting competitions and their subpar margins (due to their partnership). Their value is maybe half of what they are asking the market for. The future of Lyft is not very promising and they will not be able to deliver on the value that they have created for themselves.
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.