When our car died in Washington, D.C., 10 years ago, my wife and I had few options. We weren't living near a Metro stop; it was tough to reliably get a taxi in our neighborhood -- and even if we could, it was expensive! After weighing our choices, we shelled out thousands to repair the vehicle.
The world of 2019, however, is drastically different in this respect: Ride-sharing services like Lyft seriously shift the math for those who want to go forego car ownership. The world changes fast!
Image source: Getty Images
With the company planning to go public this year, we recently got to peek at Lyft's prospectus. I'll be honest: There's a lot in it to like. I'll be keeping a close eye on this stock.
But there's one big thing that's missing -- and it's not profitability. Until I get more clarity on this one metric, I'll be watching the stock from the sidelines.
Mission-driven and founder-led
Before discussing the subject of my qualms, let's review the factors I see as working in Lyft's favor. First and foremost, I'm a sucker for founder-led companies. Often times, founders view their companies as existential extensions of themselves; this mindset gives them an intrinsic motivation to build something with lasting value.
Co-founders Logan Green and John Zimmer are still very involved with the company as CEO and president, respectively. And both are under 36, meaning they could keep leading it for a long time.
The company also has a clear mission statement -- something else I'm also partial to. That mission: "to improve people's lives with the world's best transportation."
That improvement takes many different shapes: reducing transportation expenses for households, offering flexible employment for drivers, cutting down on pollution, shifting away from car-centric infrastructure and massive parking lots, and reducing inequality.
A little reading through the prospectus shows that this isn't just lip service. A full 44% of the company's rides, for instance, either start or end in low-income areas -- meaning the service has potential to help equalize access to transportation.
Green launched a ride-sharing service as a student at UC-Santa Barbara, and was the youngest person to ever serve on Santa Barbara's Metropolitan Transit District's board. Zimmer, while studying at Cornell, took a class -- Green Cities -- that piqued his interest in the transformative power of ride-sharing. These two believe in the bigger mission at hand.
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Superb growth and market share gains
That vision has also spurred incredible growth at the company. Just take a look at the growth of bookings (how much customers have paid for their rides) and revenue (the percentage of bookings that Lyft keeps) over the past three years.
Chart by author. Data source: SEC filings
To sum up this chart, bookings have grown at 105% per year, while revenue has grown even faster -- 150% per year. That's key, because it shows that Lyft is keeping more of what every passenger pays with each passing year.
Since 2016, two other key metrics have shown impressive growth: active riders and total rides taken.
Chart by author. Data source: SEC filings
Because it is juxtaposed against total rides, the growth in riders might seem slow. Don't be fooled: In less than three years, the total number of active riders increased almost 550%! And the average revenue per active rider more than doubled from $14.11 in second quarter of 2016 to $36.04 at the end of last year.
Putting all those pieces together yields this: The company's market share went from 22% in December 2016 to 39% at the end of last year. Given that ride-sharing services were involved in fewer than 1% of all miles traveled in the United States -- and factoring in the inroads the company is making in both bike-sharing and scooter-sharing -- the total addressable market remaining for Lyft is enormous.
Where's the moat?
Because of these factors, I don't even mind that Lyft is nowhere near profitability. For the time being, it's focusing on building market share. There's nothing wrong with that in and of itself.
The real problem is simple: I don't see a sustainable competitive advantage -- a moat -- for Lyft. Well-heeled competitors (for example, Alphabet's Waymo -- which also owns a chunk of Lyft) can easily come in and steal market share from it if they want to.
Remember that huge jump in market share I pointed out? It just so happens to have occurred starting in early 2017. That not coincidentally syncs up with the period when allegations of sexual harassment were rampant at rival Uber, and its founder/CEO Travis Kalanick was caught on camera berating a driver. He resigned in June of that year.
Of course, there's nothing wrong with taking advantage of a competitor's troubles -- especially when its wounds are self-inflicted. But Lyft's gains at Uber's expense reflect the deeper point that in this space, a company's brand image is its biggest moat. And that image can change in an instant.
In its prospectus, Lyft's management attempts to quell these fears by offering up numbers that show how each cohort of active riders -- those who joined in a specific year -- use the service more and more during each successive year.
Image source: Lyft prospectus, via SEC.
Taken at face value, this chart suggests people really are sticking with Lyft for the long haul. After all, the group of riders that started using it in 2015 took 166% more rides with the service in 2018.
But there's a sobering problem with this metric. If you started using Lyft near the end of -- say -- 2015, you'd be part of the 2015 cohort. You'd likely have only taken one ride.
If you continued at the same pace -- let's say one ride per week -- you haven't really increased engagement. One ride per week is one ride per week. You've just taken more rides in the next year because you have a whole calendar year to do so. It's therefor far more instructive to compare the usage-growth of a cohort after year two. The company admits as much in the fine print:
"Each cohort typically experiences a larger percentage increase in Rides in its second year (i.e., the first year during which the full cohort has been taking Rides throughout the entire year) than in subsequent years."
Measured that way, the retention and growth numbers don't look nearly as rosy.
- The 2015 cohort appears to be growing at 39% per year. But if we start counting after year two, it's just 15%
- The 2016 cohort has an even bigger drop off. It appears to be growing at a 30% clip, but after year two, there was just 3% growth!
- The 2017 cohort appears to be growing at 44%. That's impressive, but we don't even know yet what growth will look like after comparing one full year to another.
Putting the pieces together
There's a lot we still don't know about Lyft -- what the price per share will be when it goes public, how much the stock will be bid up (or down) in the first few days, etc. But on the key metrics of cohort retention and growth alone, the relative lack of information is enough to give me pause about making an investment.
In the absence of such evidence, I have to view ride-sharing as a commodity. Consumers can and will likely move to whatever service is cheap, reliable, and available. That's a no-moat business. And in the investment world, that's not a recipe for success.
