Popular ridesharing platform Lyft has confidentially filed its S-1 Registration Statement with the SEC. Hours later, Uber made its own confidential filing as well. Confidential filings have become popular among private companies preparing to go public, particularly after the SEC lifted the revenue limit last year. Now any company can use the confidential filing process.
In this segment from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Evan Niu discuss the latest news from Lyft.
A full transcript follows the video.
This video was recorded on Dec. 7, 2018.
Dylan Lewis: I'm also excited, Evan, because we're getting the first inklings of a Lyft IPO thanks to some news that came out earlier this week.
Evan Niu: That's right. It's funny, Lyft publicly announced that they made a confidential filing [laughs] with the SEC. They've now filed their S-1 registration statement with the SEC on a confidential basis. It's really the first step toward an IPO, which is probably going to come in early 2019 at this point.
Lewis: Yeah. This is notable for a couple different reasons. This is a company that has been private for quite some time. It's one of those unicorns that people have been watching for a while. They're also beating their competitor Uber to the public markets with this timeline, if it holds. We're seeing the confidential filing being used. Again, this is something investors have seen more and more of.
Let's unpack some of that. It seemed pretty clear that Uber would be going public at some point in 2019. They also have some incentives to go public based on some of the deals that they've structured with SoftBank.
Niu: Right. Lyft at this point being likely to go public first is meaningful, because not only are they upstaging Uber, but there's quite a bit of investor demand to get into this ride hailing space, and it's really just Uber and Lyft as the main ride hailing companies if you exclude, before we talked about Waymo and Alphabet (GOOG 2.49%) (GOOGL 2.30%). As far as pure-plays go, it's really Uber and Lyft. And I think there's quite a bit of pent up investor demand and interest in this space. Whoever can get out there first might be able to capitalize on some of that pent-up demand being let loose, and investors for the first time having a chance to get into this space.
Lewis: And as the smaller player, too. Lyft is that clear #2 in ride hailing. They're about a fifth of the size of Uber. For them to go public, enjoy all the name recognition that comes with that, all of the PR, all the press, that might help with some adoption here in the U.S. and Canada, where they compete with Uber, and really help them close the gap. They have a long ways to go to make that happen, but I have to imagine going public will help a bit.
Niu: Absolutely, in terms of brand awareness, you're absolutely right. Uber is much more prominent in more markets around the world. As you mentioned, they're a lot bigger. Lyft is really just in the U.S. and Canada. They don't have a lot of brand recognition outside of North America. So, this will probably raise that awareness a little bit.
Lewis: Unfortunately, we are kind of grasping at straws for what Lyft's financials look like. Details are a bit scarce right now. You mentioned this confidential filing. A lot of people probably don't understand what that means and why companies are allowed to do this. So, just as a little primer, and something that you can stow away, because you're going to see this more and more -- confidential filings are a relatively new thing. It was something that was opened up as part of the Obama-era JOBS Act. Ideally, it was supposed to be used for small companies, ones that have less than $1 billion in revenue, to confidentially file a draft registration with the SEC months and months before going public. The idea there is, they wouldn't be opening up their books to public scrutiny before deciding to go public and making that step. Once they did that, all the paperwork would become available 15 days before the company would begin its IPO roadshow.
Like I said, this started with small companies as part of the JOBS Act. Mid-2017, the SEC decided, "We're going to eliminate that cap on $1 billion in revenue." And you're seeing all these larger companies doing that now.
Niu: Right. I think Lyft certainly qualifies in there. They're above $1 billion in annual revenue. They're taking full advantage of that.
Lewis: Yeah. And when you're in a space where you have such a clear competitor in Uber, it totally makes sense that you don't want to have to show them your books and your key business metrics.
Niu: Right. For private companies, keeping the books kind of under wraps is pretty important, particularly when you talk about this type of competitive space.
Lewis: Big picture, the confidential filing is not a shady thing. This is something that was passed, like I said, during the Obama administration as a pro-business thing, making it a little bit easier, a little bit less intimidating, for small companies to wade into the pool of going public, and starting to have those conversations with the SEC. Now, I mean, is it great for investor transparency? Not necessarily. I think ultimately, the companies that do wind up going public will wind up providing all the necessary paperwork, and people are going to be getting it well ahead of when the companies start their roadshow and start approaching investors anyways. It's a timing thing more than anything else. You'd like to have the information, of course, but it isn't anything to be too concerned with.
Niu: Right. The timing of this is important, too. When they first passed the JOBS Act, it was 2012. With that $1 billion limit, the goal was to basically get these start-ups to consider going public more. Startups are an important part of the economy, they have a lot of jobs. But, I think what they didn't foresee was the age of the unicorns sprouting that we've seen in recent years, where you have all these companies that are becoming quite large but staying private. I think that's the context of why they've changed this limit to allow these larger companies to take advantage of the confidential process, like you mentioned.
Lewis: Yeah. And looking at the slate of potential 2019 and 2020 IPOs, we're just going to see more and more of this. There's Uber, Lyft, Palantir, Airbnb. There are a ton of really big, highly coveted private companies out there now that are probably considering an IPO at some point soon. Investors, you're going to see this confidential filing come up again. That's what it means.
In talking about this in prepping for the show, I threw out there on Twitter that we were going to be talking about the Lyft IPO and was curious if anyone had any questions. We have one from listener Austin. He asks, "Not sure anyone saw the Lyft IPO happening before Uber. Which company is the better company?" Evan, we might think that they're kind of synonymous because a lot of people use them interchangeably. But these are two totally different companies.
Niu: Right. Not only in terms of size, but there are also some pretty big strategic differences, particularly with how they're approaching autonomous driving over the past year. Uber has had such a tumultuous experience with trying to develop self-driving cars. They had this whole trade secret thing where they reportedly hired a Google engineer and he stole a bunch of stuff, and they had one lady die from one of their autonomous cars. So, they really pulled back quite a bit on their investments in self-driving vehicles. Whereas Lyft is trying to expand more into it and keeps pushing more and more. That's going to be a pretty core differentiator long-term -- I mean, super-long-term, because we're nowhere near close to actually having self-driving cars.
Lewis: It's a key element to the long-term thesis for both of these companies. We don't have a ton to go on here, in terms of company financials, to do an apples-to-apples comparison. If you want some of the highlights, though, you can look and see, Uber is international, they're in over 60 countries. Lyft is focused in the U.S. and Canada. Uber has some other businesses. They also do Uber Eats and they have a freight business. Lyft is pretty much focused on ride hailing and some of the micro mobility stuff that John Rosevear and Nick Sciple were actually talking on yesterday's show. If you want a little primer on that space, definitely check that out.
Uber also has some brand baggage associated with it. They've moved away from the Travis Kalanick era, where there were a lot of problems with the corporate culture there, some of the things you mentioned with the corporate espionage with Google. Lyft doesn't have that. Lyft is like this nice soft and fuzzy brand. [laughs]
Niu: Right. I mean, I'm not a big user of ride hailing services in general because I live in the suburbs, but I will say that in general, my wife and I absolutely refuse to use Uber whatsoever, even when we're travelling and when we need to use ride hailing locally, specifically because of that brand baggage that you mentioned. Their internal culture and ethics under Kalanick were just so horrendous, in terms of just the cutthroat things they would do with competitors, their internal culture with women, the misogyny, there's a whole long list of things that's not worth covering right now since it's so long. [laughs] But, I personally will not use Uber. I'll use Lyft, and we'll use Lyft whenever we need to. But, speaking of brand baggage, we just don't use it.
Lewis: There are, though, plenty of people that are happy to use Uber. There are a lot of people that look at the price and say, "What's the better price? What's the better fare?" Some context around what we do know for the books of these two companies: Uber did $2.7 billion in revenue in Q2 of 2018, which is up 51% year over year. They're posting adjusted EBITDA losses of around $400 million on that revenue. Lyft, in the first half of 2018, did somewhere in the neighborhood of $900 million in revenue, up 120% year over year, and posted a net loss of $370 million on that. Neither of these businesses are profitable. Both are growing very quickly. Those growth rates and the revenue bases really speak to the size of these two companies. It's kind of a Coke and Pepsi dynamic.
Niu: Right. That's one thing that jumps out to me, is how much money these companies lose for operating a fairly capital-light business. They're just operating a platform. I've always looked at ride hailing in its current state, it's kind of like it's subsidized by venture capitalists, because they offer these rides for so cheap that are below cost, which is why they had to raise so much money. Uber has raised $25 billion over 21 rounds. Lyft has raised like $5 billion. These companies just devour so much capital. And it's kind of hard to justify why. Of course, if you're investing in autonomous cars and stuff, that makes sense. But even the core operations ... we'll get more detail whenever they actually start showing us the books, but my sense is, they're still losing a lot of money up front.
Lewis: Yeah. I think Austin will get his more responsible and direct answer from us down the road when we can really look at both of these companies. What I will say, though, is that the future is so dependent on autonomous vehicles for both of them. The idea that they can dramatically bring their cost structure down by having a fleet of autonomous vehicles and not having to pay drivers makes the numbers look a lot better for this kind of business. You think, OK, there might be a relatively easy path to that. But, no. This is an incredibly competitive space. Just as a case in point for that, Alphabet's driverless car company Waymo announced Waymo One this week. This is a commercial ride hailing service. They're piloting it in the Phoenix metro area. And rides are going to be carried out with a safety driver, but this is another step toward self-driving cars taking hold. And Alphabet is not a company that needs to win self-driving cars to have their future work out. They have way more money than Uber or Lyft possibly can, and they're beating both of them to market in autonomy.
Niu: Right. Longer-term, it's just so uncertain who's going to actually get to full autonomy first, like level five autonomy because it's such a tough challenge to tackle from a technical standpoint. Some companies use LIDAR. Most companies use LIDAR, but some are trying without LIDAR. It's not clear yet what approach is actually going to get people there first. Then, on top of that, then you have to turn around, look at how you're going to actually create a business model out of it.
Lewis: Yeah. And then, GM is in there with Cruise; Ford has its own mobility play. It's a crowded space. You have a lot of players with a lot of different incentives. Like you say, whoever cracks autonomy first is going to be the one who drives the way this industry goes. It's a hard business either way. You'll get more details from us as we get the company financials. But, if you do nothing else, if you're not an Alphabet shareholder, that's a pretty easy way to access this market. And, you have the backing of a rock-solid monopoly to throw off cash while they invest in this kind of stuff. As an Alphabet shareholder, I'm happy to say, if this winds up becoming something that contributes to an already-strong ad business, awesome, because they're the leader in this space right now.
Niu: Right. We're just going to have to wait and see. I'm personally not interested in either Lyft or Uber because of everything we just mentioned. But it'll be interesting to look through the numbers when they finally give us some.
Lewis: Yeah, I cannot wait. Unfortunately, we're going to have to wait until 2019.
