Lyft-Off: Pricey But Massive Potential Ahead

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About: Lyft, Inc. (LYFT)
by: JP Research
Summary

Lyft's market share has continued to grow, hitting 39% in America over 2018.

Plenty of growth - revenues doubled during the 2018 period to close the year at $2.2 billion.

While the firm is yet to be profitable, its net loss margin halved over the 2018 period.

There is still plenty of room for growth - ride-hailing covers only 1% of total vehicle miles traveled, and Lyft has plenty of cost efficiencies to tap into.

Stock is pricey at ~9x sales, but might be worth a look for growth investors who can stomach volatility.

Lyft (NASDAQ:LYFT) is one of the newest disruptors. The firm has come up with a car-pooling system, which is meant to see individuals adopt the shared services economic model and, therefore, reduce traffic in major cities globally.

Two pieces of American statistics back this concept: traffic congestion across American cities cost drivers ~$305 billion in 2017 and that ~95% of the useful life of today's cars is spent with them parked. Through ride sharing, Lyft provides a platform through which vehicles can be more efficiently utilized thus, reducing the number of vehicles on the road. In sum, Lyft leverages the ride-hailing model to provide a holistic solution to traffic congestion and carbon emission problems in major cities.

Investors have credited this business model as being a highly disruptive one. However, Lyft's cash flow profile remains in the red, though the company has a future seemingly filled with promise. It, therefore, comes as no surprise that investors have continued to place their money in the firm as witnessed in prior private placements, which culminated in the recent IPO.

Questions, however, arise as to what exactly has driven such investment; the answer to which is one word: growth. The growth profile of Lyft has continued to amaze investors even as the company remains in cash burning mode.

First, the firm's choice to adopt an asset-light model has been particularly beneficial to them. Through this, the cash generated from their operations or raised from investors is generally focused on growing their reach and consequently their financial capacities. In addition, the model ensures companies can grow exponentially as the capital expenditure is minimized. More money is, thus, invested in creating future revenue growth and improving efficiencies.

The Lyft case is no different. Their revenues have been on the rise since 2016 and doubled between 2017 and 2018 whereby they increased from $343.3 million to $1.1 billion to $2.2 billion, respectively. Moreover, its market share - which is now significant at 18.6 million riders and 1.1 million drivers - has also risen from 22% in 2016 to 39% in 2018. Despite this, the firm's bottom line has shown little improvement as the losses increased from $682.8 million and $911.3 million between 2016 and 2018. Nonetheless, the growth in the market share and revenues highlights the company's effort in increasing penetration in new markets and maintaining its growth runway.

Plus, with the world moving to bicycles and scooters in a bid to combat climate change, Lyft has purchased Motivate - a bicycle company - and launched its scooter line to remain ahead of the pack.

Finally, with the continued growth in the driverless car space, Lyft has ventured into the market by purchasing Blue Vision Labs, an augmented reality firm with the potential of growing into the driverless car space. The firm is using this to get street-level images and mappings to aid in their venture of developing autonomous cars.

While consensus seems to have turned bearish on Lyft's outlook, we think there is potential - from both its future growth runway and margin expansion potential from cost efficiencies. Assessing Lyft's value based on current financials can be misleading as the company continues to invest heavily in future growth - we expect losses to widen in the foreseeable future as Lyft focuses on growing its rider base.

However, we think there is massive operating leverage potential once the company achieves its active rider base target. We'd also highlight Lyft's untapped pricing - revenue per ride currently stands at $3.48 - and addressable market potential - Lyft sizes this at $1.2 trillion. With ride-hailing only at 1% of total vehicle miles traveled, there are plenty of opportunities for Lyft to expand its TAM as the cost gap between vehicle ownership and ride-hailing narrows.

Business Overview

The Lyft case comes as no surprise in today's evolving world. With the world inclining itself towards increasingly efficient asset utilization, more people are embracing the idea of pooling resources. The shakeup associated with this new approach has impacted nearly all economic sectors but especially so for the ride-hailing business segment.

While other companies previously dominated this space - especially the first movers and pioneers - Lyft has continued to cause further disruption therein. This very fact has propelled it into being a billion-dollar corporation which commands a significant market share across the major global economies.

More and more, it seems that the market is accepting new technologies and, consequently, appreciating the system-backed, trust-based economy which these companies present. Upon this backdrop, these companies have continued to come up with revolutionary technologies, some of which shape our outlook towards different aspects of life and provide new approaches. Such is the case with Lyft.

Lyft began as a ride-sharing company Zimride, which focused on campuses across the United States. However, with their growth came the need to venture outside campuses, and this necessitated their strategic reorientation and subsequent name change to Lyft. Currently, the firm operates as a ride-sharing service/ride-hailing platform. In sum, about five different options are given to their clients whereby the shared ride service - where a driver is matched with individuals who are heading in the same direction - is the cheapest option. Riders book their rides - after downloading the application - and pay for the service using their respective payment method upon arrival.

Through a mix of both quality service delivery and increased product lines, the firm has gained significant market share among ride-hailing companies - ~39% in the United States. This has had a considerable impact on their top line and propelled them to their current market share (further discussed below).

Financial Overview

The firm's revenues have been growing drastically over the past few years. In 2018, the firm made ~$2.2 billion in revenues, making this the best performing year since inception. This was primarily driven by the growth in Lyft's market share during the period. In addition, while losses rose from $388.3 million to $911.3 million during the 2017 and 2018 periods, the net loss margin declined by half, falling from 62% to 31%. This spoke to the firm's control over its costs, which we see as a big plus for management. Finally, the firm's operating cash flow deficit also reduced from $393.5 million to $280.7 million.

Given its financial results, Lyft's outlook becomes clearer. While their loss position is not in question, neither is their growth trajectory. The proper cash and cost management speaks volumes about the management team's capacity and their impetus to lead the firm both to profits and growth.

Valuation

The firm's valuation has skyrocketed over the years from $2.5 billion back in 2015 to their current valuation of $22.8 billion, representing a ~9x return over three years. The fundamental driver of the valuation rise comes down to two interrelated factors - 1) the growth in the revenues and 2) the growth in market share - with the latter driving the former.

With the number of rides taken up using the Lyft service increasing over the years and expected to increase in the future, it is almost certain that the firm will continue to grow. With plenty of untapped markets abroad, we think their entry into new markets will play a key role in future growth.

Conclusion

The team at Lyft has certainly been working on overdrive to ensure that they grow. With their top lines higher and their cost margins lower, the current trajectory is positive.

While we do acknowledge Lyft's continued losses, we think current financials are misleading as the company invests in future growth. We think Lyft's massive operating leverage potential is being ignored currently - once the company achieves its active rider base target, we think Lyft is well positioned for steady state profitability.

We also point to two key factors - Lyft's untapped pricing power and addressable market potential as the cost gap between vehicle ownership and ride-hailing inevitably narrows. Overall, we think Lyft is at the beginning of a massive multi-year growth opportunity - even at ~10x sales, Lyft may be worth a look for long-term growth 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.