Where's the Lift in Lyft?

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I don’t make a habit of writing about the stock market, but with the number of tech startups preparing to go public I find it difficult not to talk about these companies in my class at Babson. I also received a number of emails about my post, Speed Kills, and in particular the example of ZipCar that I used. I see some similarities between ZipCar and Lyft and not just because they are both transportation companies. ZipCar at one point had a valuation in excess of $1 billion and then sank. This hit to the stock came at about the same time the company decided to slow its growth and attempt to become profitable. Those who bought the stock on the growth story sold. But in retrospect I believe that investors also saw the flaws in the business model and the threat of new technology enabled companies with new business models, namely Uber.

Companies without profits, or even visibility into when they might become profitable, are valued in the billions of dollars largely based on the belief that revenue growth will continue on a similar pace, market share will be gained, and eventually operations will become more efficient and generate cash flow and profits. Lyft has traded down almost 20% since going public. A recent article in Motley Fool blames short sellers, Wall Street analyst sentiment, and the Uber S1 as reasons for the recent swoon. The company itself is pointing the finger toward Morgan Stanley claiming that it is allowing pre-IPO investors to short sell. I find it interesting that no one has cited the business model itself.

Lyft’s growth on a percentage basis is actually stronger than Uber, but it isn’t even close in terms of revenue dollars and revenue streams. Uber’s revenue is 4 times that of Lyft. However, the cost model is where things really seem to get wonky. First, there are the drivers who are not employees, yet. Then there is the cost to acquire customers which remains high. Then there is always the threat of regulation and, of course, new technology that will enable new business models and new competitors.

The market in which Uber and Lyft currently play is forecast to grow to be in excess of $280 billion by 2030. If this market plays out like most it will devolve into one gorilla, two monkeys, and a bunch of chimps. I will not try to predict who will be the gorilla, but it will take a lot of cash and a willingness to continuously innovate the business model as new technology removes cost from the current model. Uber currently appears to be on track to be the gorilla and is hedging its bets through continued investment in technology and additional revenue streams. As for Lyft, it will be interesting to watch to see if it can be the Avis to Uber’s attempt to become the industry’s Hertz.

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