This post summarizes my analysis of Lyft.
I hope you enjoy reading it and feel free to add your take and agree/disagree with what's mentioned below.
The post is divided into the following sections:
- Introduction
- Historical financial performance
- The balance sheet
- The main problem
- Assumptions & valuation
- Valuation based on assumptions different than mine
Introduction
Those who are in the US are for sure familiar with Lyft. How I'd describe it in one sentence, is “Uber's little brother”.
It offers a ride-sharing marketplace, but also vehicles for hire, motorized scooters, bicycle sharing, and other services related to transportation.
The company became public back in March 2019, which means within 4 years, its share price got a significant haircut (down almost 90%). The market cap is close to $4 billion.
Historical financial performance
One thing that is in common for most companies that have gone public is:
– They have a big story that grabs the attention of the investors (and makes them feel that if they don't invest, they'd be missing out)
– They have had a good financial performance for the last few years
Lyft was no different. Take a look at the revenue growth prior to the IPO:
2017 – 209%
2018 – 103% (reaching almost $2.2 billion in revenue)
What can one expect from a such high-growth company in the future? Probably something comparable, right? Well, between 2018 and 2022, the revenue grew at CAGR (“Compounded annual growth rate”) of 17%. Here's the breakdown:
2019 – 68% (Still good!)
2020 – negative 35% (due COVID-19)
2021 – 36%
2022 – 28% (reaching almost $4.1 billion in revenue)
Of course, we can point to COVID-19 for the disruption of revenue growth, but the average analysts' forecast is 10% revenue growth in the coming years.
So we have a company that started with a big growth story which is no longer there.
To make things a bit worse, the gross margin of 40% isn't sufficient to cover the operating expenses that are close to double the gross margin. This means Lyft needs to cut its operating expenses in half only to break even. Are they making progress on that topic? Let's take a look at the operating expenses as % of revenue in 2018 (prior to the IPO and COVID-19) and 2022:
Operations and support: Decreased from 16% –> 11%
Research and development: Increased from 14% –> 21%
Sales & Marketing: Decreased from 37% –> 13%
General & Administrative: Increased from 21% –> 31%
Total: Decreased from 88% to 76%
This seems all over the place, some expenses are better managed, others a bit worse. Again, as mentioned above, they need to reduce to 40% only for Lyft to break even.
The company is yet to find its way to profitability and for the year 2022, its operating margin was -36%. From its operations, Lyft was losing over $1bn/year! For comparison, its market cap is under $4 billion now.
Of course, this is where share-based compensation comes into play. A big chunk of the operating expenses, related to the employees and the management was paid in shares. In fact, since 2018, the # of shares outstanding has increased by 32%! If we use the share price back at the time when these shares were earned, that amounts to $3.5 billion only in the last 4 years.
The # of shares outstanding has been increasing between 5% and 10% every year!
If the employees and the management do not believe in Lyft, they're going to sell these shares, which brings the price down even more.
If we adjust for this non-cash expense, Lyft is losing around $300 million from its operations.
The balance sheet
One of the questions that always arise in money-losing companies is “Is this company going bankrupt?”.
I don't think this is likely to happen in the next few years. Lyft has cash, cash equivalents, and short-term and long-term investments of over $2.8 billion, while the total debt (including leases) is around $1 billion. This net cash position is sufficient to sustain the losses for quite some time.
The main problem
We have a company that is struggling to find its path to profitability and doesn't have huge growth ahead. So what can the management do? Oh yes, a LOYALTY program! This is oftentimes the proposed solution to such a problem for a company that is in a competitive environment. But this actually highlights the real problem within the ride-sharing industry.
There's absolutely no stickiness. If I put myself in the shoes of a customer or a driver, why would I use Lyft (or Uber) if another company offers better prices? There's nothing stopping customers or drivers to switch from one company to the other at moment.
Yes, a loyalty program sounds good, but it isn't free. Any discount would lead to retaining customers, but it also means less revenue for the company. Ultimately, Lyft would be the one paying that price, which doesn't help its journey to profitability.
Assumptions and valuation
For anyone that doesn't see a company becoming profitable, well, there makes no sense to go through the exercise of running a DCF valuation. I am going to run this exercise as there are always readers with different views than mine. I'll start with one scenario:
- Revenue: Growing at 10% for the next 5 years, then declining to 3% by year 10 (This leads to revenue doubling in 10 years time)
- Operating margin: Break-even at year 5, increasing to 8% by year 10
- Discount rate: 11.61% –> Reducing to 9.94% as time goes by and the company becomes profitable
After adjusting for everything that's on the balance sheet as well as the outstanding equity options, the outcome is close to $1.8 billion ($4.7/share)
This is roughly half of the current market cap of $3.8 billion ($10.60/share).
Valuation based on assumptions different than mine
Let's take a look at how the valuation changes if we use different assumptions (also, under which assumptions the company is fairly valued today).
Below is a table that shows the fair value per share, based on different assumptions related to the revenue 10 years from now as well as the operating margin.
| Revenue / Operating margin | 6% | 8% | 10% | 12% |
|---|---|---|---|---|
| 75% ($7.2b) | $3.4 | $4.6 | $5.9 | $6.9 |
| 100% ($8.2b) | $3.3 | $4.7 | $6.0 | $7.7 |
| 150% ($10.2b) | $3.2 | $4.7 | $7.0 | $9.7 |
| 200% (12.3b) | $2.6 | $5.4 | $8.2 | $11.4 |
At today's share price of roughly $10.60/share, to be fairly valued, Lyft needs to grow its revenue by 150-200% in 10 years' time and reach an operating margin of 12%.
The big story that evolves around autonomous driving and the idea that Lyft will be able to capitalize on that is still there. However, they're not the only company that is aiming at that. It's not only its big brother Uber as well. There's Tesla, other car manufacturers, and Apple/Amazon are always there to jump at an opportunity.
As always, thank you for reading the posts, and until next week for the next valuation.
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