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Highlights From Lyft's Prospectus

By Evan Niu, CFA and Dylan Lewis – Updated Apr 12, 2019 at 5:58PM

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Lyft is speeding off for the public markets with a real mixed bag of a business model.

In the hypercompetitive ridesharing space, it looks like Lyft will be first to market, beating out industry giant Uber. In this episode of Industry Focus: Tech, host Dylan Lewis and contributor Evan Niu dive into the prospectus and explain what we know about this business so far. Some of Lyft's trends are definitely on the positive side, but there are more than a few yellow flags for investors.

Tune in to find out what you should know before buying shares of this company: how the business works, why it's not profitable, what it would take to become profitable, the biggest risks to track, and more.

A full transcript follows the video.

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This video was recorded on March 8, 2019.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Friday, March 8th, and we've finally got our hands on Lyft's financials. I'm your host, Dylan Lewis. I've got's Evan Niu on Skype. Evan, not only do I have you on Skype, but you can now see me on Skype.

Evan Niu: It's a whole new world!

Lewis: It's a whole new world! Thanks to a lot of hard work from our man behind the glass, Austin, we can now see each other. Hopefully we can pick up on some of those nonverbal cues, maybe get a little bit more banter back and forth. I'm very excited!

This is the kind of stuff that we're trying to do to keep making our podcast offering better and better. Evan, pretty busy week for you. You cover the tech beat and you cover a lot of our really high-profile tech companies. We finally have a chance to look at the financials for Lyft, which is going to be one of the big IPOs of 2019. We couldn't not talk about it this week.

Niu: They dropped it last week. I know you had something else planned for the show, so we had to wait a little bit. Gave me more time to dig into what's going on. A pretty high-profile company. A lot of people are excited, particularly investors, to potentially get a piece of this company. 

Lewis: There was a part of me that was a little sore that they released the information on a Friday just after we had finished outlining another show. But, so be it. We had more time to do our preparation. Today, we're going to be talking about their books. We're going to talk about some of the core business metrics, what people need to be aware of with this company. And then we're going to take some listener questions as well, because we put out a call on Twitter just to see what people wanted to hear about.

Before we get into the in-depth discussion, though, there are probably some folks that are a little unfamiliar with Lyft, or maybe don't know about the full depth of its product offering. Evan, you want to give them the rundown? 

Niu: Sure. Most people are probably familiar with their ridesharing operations. You have an app on your phone and you can pretty much call a ride anytime you need to go somewhere, and instead of a traditional cab coming, it's just another person, another regular person that's a driver, comes and picks you up. This whole space has been blowing up a lot over the past few years. More broadly, they consider themselves a transportation-as-a-service company. Alternatively, the company is called mobility-as-a-service. Whatever you want to call it, it's basically getting people from point A to point B in whatever way possible. A lot of these companies are also expanding to other areas. They do want to develop autonomous driving technology. They're now getting into e-scooters, which is the latest thing, have some start-ups that have entered this market in a big way with these e-scooters you can rent for super cheap and maybe travel short distances. Lyft is getting into that, too. They have their hands in a lot of pieces of this.

Lewis: Yeah. Most people think ride-hailing with this business. Scooters are a new development. We looked through the prospectus, didn't get a lot of information about the scooter world for them, aside from the fact that it is non-material and not something that really has a very different revenue profile than the core ride-hailing business. So, when we talk about the financials for this company, we're really talking about ridesharing, ride-hailing.

Niu: Right. They only got into scooters a few months ago, I believe in September. They actually launched here in Denver, where I live. I don't go downtown too often. My wife works downtown. But I have seen a couple of them already here and there whenever I do go down there. They're all over the place, just scattered around. 

Lewis: That's been my experience in D.C. as well. They're very popular there. We have Lyft, Uber, Lime, Bird, all big four competitors in that market. Columbia Heights metro area is just covered in scooters. They're all over the place. Sometimes they're halfway down. That's a cranky old man problem for me to have. But it is very fun to drive them around. I will say that.

Within the core ride-hailing market for this company, they are really No. 2 in the United States. Uber -- can't talk about Lyft without talking about Uber -- is the No. 1 player. By Lyft's estimates, they have about 39% of the U.S. market. 

Niu: They've been growing their market share. Uber has had plenty of mistakes and stumbles on their part in terms of corporate culture, ethics, all sorts of things. I think that tarnished the brand a little bit a couple of years ago, and Lyft was able to capitalize on that and really establish themselves as more of an ethical company. People like that. Personally, I don't use Uber for exactly those reasons. If I need to catch a ride somewhere -- I have a car and I live in the suburbs, so I don't take ridesharing as much as you might, but if I do, I take a Lyft.

Lewis: Yes, and I am intimately familiar with this company's product because I do not have a car and I live in a city, so I am taking a ridesharing pretty much all the time when I'm trying to get anywhere that isn't easily Metro-accessible. I am not the only one, Evan. This is a company that is doing quite a bit in revenue, $2.2 billion in 2018. You mentioned the growth earlier, up 103% year over year. This company is really moving along with the top line. That revenue is becoming a larger and larger portion of the overall billings. Just as a quick how-that-number-works, billings is something you can think of the same way that PayPal has facilitated payments or total payment volume. That is what they make through their platform. That $2.2 billion is actually what they bring in in sales.

Niu: Right. They have a bookings number, which is pretty much what they charge for the rides. Excludes certain things like pass-through amounts. If you tip your driver, that just goes straight to the driver, that's not included in bookings. Their revenue is a cut of that total bookings. That percentage of how much they're keeping on average is a pretty important figure, and it has been steadily rising over the years. 

Lewis: Yeah. So, for them, they're basically making money on what they make in terms of service fees for getting those riders hooked up with the drivers, and then a commission as well. That's where most of the revenue's coming, especially on the ridesharing side of the business. Pretty big revenue number there, $2.2 billion. Pretty big loss number as well, Evan.

Niu: Yeah, they're bleeding out quite a bit. Even though they're growing in terms of these rider metrics, their operating losses are also widening. This business is still very unprofitable, and not really clear how they can get to profitability.

Lewis: A big part of that is the fact that they are doing quite a bit of discounting, quite a bit of marketing, in an effort to combat Uber and become the de facto player in this space. 

Niu: That's, to me, one of the big things that I'm concerned about with this company, and what I've been looking into a lot. It's always been about price because ridesharing is fundamentally very commoditized. As long as you can get the person where they need to go, really all that person cares about is how much they're paying. It's really going to be a cutthroat business. Uber and Lyft have always offered rides extremely cheaply. That's part of why they've taken over and really hurt the cab industry. But, at the same time, in my opinion, I feel like they brought these prices down to these unsustainably low levels, and it's really hard to bring them back up if you've established this precedent and consumer perception of what something should cost. It's much easier to go down than it is to go up.

Lewis: And the way that those discounts show themselves in Lyft's financials, it's a little funky. Some of them come through as a marketing cost. Some of them come through as a reduction in revenue. A little tricky to work through that.

Niu: Right, and that's exactly another thing that's concerning to me. I want to know how much this company is spending total on these rider incentives like promotions and discounts. But depending on the nature of the promotion, it gets booked as either a reduction in revenue or as a sales and marketing expense. It's split up. Furthermore, they disclose a number within sales and marketing, but they bundle and aggregate it with another program, which is driver referrals. Driver referrals and rider incentives in 2018 we're about $300 million, which is about a third of their total sales and marketing expense. But, that doesn't tell you how much was a reduction in revenue. That doesn't tell you how much they allocated to which. So there's a lot of questions still here, in terms of how much they're spending to basically subsidize these rides.

Lewis: Yeah. We mentioned the losses. You combine marketing with those SG&A expenses, you've got a $1.4 billion cost combo right there. 

Niu: It's part of the total. 

Lewis: Yes. Some of the other big line items for this company. Their R&D spend, pretty high. That's tied to a lot of the efforts we're going to get into later in terms of where this industry is going. But that's not going anywhere, either. They do give us a breakout of how things look on a contribution margin basis, which is nice. I appreciate dusting off my managerial accounting textbook and getting a look at that side of the business. You don't always get that, Evan.

Niu: Right. They're growing quite a bit there. I think that's another one of these non-GAAP metrics that they're trying to give you. Contribution margin was 42% or so last year. 

Lewis: Yeah, that's about right. Cost of revenue, $1.24 billion on that $2.2 billion in sales. I think that's as close as we're going to get to some unit economics discussion from this company. It's tough to pinpoint exactly what they will be doing on an operating profit basis just because the subsidies make it tough. But, this is what we have to settle for, Evan.

Niu: Right. I would like to get down into that, but it's tough because every ride is different, in terms of the distance traveled, how long it takes, what market you're in. There's so many factors that boiling down into the underlying economics is really challenging without them giving us more information. 

Lewis: Yeah. We mentioned the growth story. Over 100% last year. This company put up just about $300 million in revenue in 2016. They are still very early on in their growth phase. And I think that, while it's helpful to look at the financials, it's really good to look at some of the core business metrics for a company like this, too, and get a sense of what is going on. For me, the big ones are active riders, their revenue per active rider, and then some of the things that are a little bit more as-a-service. Why don't we talk about some of those?

Niu: Active riders, they've more than tripled their user base over the past couple of years. Now they're at about 18.6 million. Revenue per active rider is also increasing, which is a good, healthy trend that you like. In the fourth quarter, it was around $36. The total number of rides is also increasing at the same pace. If you divide it out, the rides per active rider, the frequency of rides an average person is taking is growing, but not super fast. For example, it was 8.3 back in the first quarter of 2016, and now it's 9.6. There's some growth there, which suggests that the average person is using the service more. But it's not some crazy number, like 8 to 12 or 8 to 15 or something like that. 

Lewis: Yeah. We talked about how this is a company that is billing itself as an as-a-service business. It's hard not to hear that and then think about the numbers that a software-as-a-service company might be providing. We see something kind of similar to that when they break out their numbers as well. I really like this. They give their customer cohorts by year and track what their usage looks like year to year. I think that's a really helpful look into what's going on in terms of user experience and how engaged people are with the service. 

Niu: Right. I think that's another angle they're looking at. People that have been on the platform longer end up using the service more and more. That's another angle to look at, how often people are using the service.

Lewis: To put some numbers to that, the 2015 cohort, which is the first one they made available, took 25 million rides in year one. 2018, we have 67 million rides from that cohort. We've seen pretty solid growth at pretty much every group that they've brought in. But most of that growth is being realized in the second year of the customers. After that, it's more marginal growth. So, that's something to keep in mind. I think that's a number they will probably spend a decent amount of time touting because they're trying to bill themselves as an as-a-service player rather than just linking people up and having that be the business.

Niu: Right. I think overall, the broader industry does have a lot of healthy trends going on for it. They point to a lot of these things. People tend to underutilize their cars. In terms of asset efficiency, it's better to share a ride. We collectively allocate way too much real estate to parking. Things like that. I do think they have a lot going for them. And not only them, but the broader transportation-as-a-service trend that we've been seeing. 

Lewis: Yeah. In some ways, I think that they're pretty early on in the growth story, even on the customer side. Living in a city, all of my friends have Lyft. Most of them probably have Uber installed on their phones, too. But, to see that that number of active riders is only about 18.6 million, that shows me that we're still in the early innings of ridesharing and ride-hailing. 

Niu: Right. I think they estimate that they account for only about 1% of total miles traveled in the U.S. so far. That's still a pretty small number. I mean, where the limit is -- because, certainly, a lot of people always just want their car for that sense of freedom and independence, you can just do whatever you want. So, I think there is some limit. But, it's certainly way higher than 1%. 

Lewis: All right Evan, I mentioned on Twitter that we were going to be talking about Lyft and I wanted to see what followers were interested in. We've got a few questions here. We're going to kick things off with a question from Monique. She says, "With Lyft, can we trust the corporate governance?" I think this question probably gets at some things that we've talked about in the past when we've done these prospectus shows. I'm thinking specifically about Snap here.

Niu: [laughs] Unfortunately, the reality these days is that so many of these companies that go public really love this -- particularly tech companies in Silicon Valley -- they have this really founder-based approach to how they treat corporate governance, and Lyft is no different. It's not as bad as Snap, where they're not giving public investors any votes. But Lyft is very much doing a dual share class structure, again, like we've seen these other companies do. The shares that they're selling to public investors will be class A shares, they'll be one vote per share. The class B shares will only be held by co-founders Logan Green and John Zimmer. Those get 20 votes per share. There's still a lot of blanks to be filled in in this prospectus since it's still just the first draft, so we don't know exactly how much voting power they're going to have. But I think it's expected to be around 50%. Now, whether or not that number falls above 50% or below 40% is going to be a pretty big thing to keep an eye on. If they have over 50% voting power, they have majority control combined and public investors don't have too much they can do to influence these key decisions. So that's one number to keep an eye out for.

Lewis: All right, we have another question. This is from @FinanceTweeting, no name associated with the account so we're just going to have to go with @FinanceTweeting. This person asks, "What do their driverless car efforts look like? How do they stack up to Uber?" I think this is the multibillion-dollar question for this industry. Autonomy is going to be such a big part of how these businesses really make the numbers work.

Niu: It really is. To me, that's really, can they create sustainable businesses? That's going to be a huge part of keeping their costs in line, allowing them to scale. Lyft is investing aggressively in autonomous technology, but they're late to the game. They started back in 2017, whereas other people have been around for much longer. The big one is Waymo, Alphabet's subsidiary, which also incidentally is an investor in Lyft, and today announced that they're actually going to start selling their lidar sensors as a way to try to bring these costs down. They're making some big moves on their own. Uber had killed off its self-driving program in Arizona after one of their vehicles killed a pedestrian in a high-profile accident in recent memory. Tesla is out there, too. Tesla has a very different technological approach. They're not using lidar, whereas everyone else is. Tesla's semi-autonomous/ autonomous technology is very controversial in its own right. They do hope to eventually compete with their own Tesla network where people can just click on their app, "share my car," and then someone else can summon and basically use it as a ride-share.

Lyft also acquired Blue Vision Labs in October, which is a computer vision company that will be part of their self-driving program. They also have a third-party company, Aaptiv, which has a fleet of autonomous vehicles that are already on Lyft's network. They've done about 35,000 autonomous rides so far.

Lewis: If it wasn't clear from the beginning of that answer, there are a lot of players that are in the autonomous driving space. You spent a lot of time talking about the tech players. There are also the legacy auto manufacturers that are in the space, too, which is going to make it really hard. I think the reality is, these businesses, especially Google and some of the bigger players, they just have a little bit more money to work with than a company like Lyft.

Niu: Right. It's a good point that you made about the legacy auto players. GM has Cruise. Autonomous driving is a huge thing that everyone is after, but it's such a complicated challenge. Even Apple's going after it at this point. It's just so complicated and there's so many scenarios that people run into when you're driving that it's really up in the air as to when this technology will be ready in general at wide scales to where everyone can have access to it. I do think it's still quite a few years away. 

Lewis: Yeah. The reason that there's so much focus on it, though, is you think about the current model. You have Lyft connecting riders looking to get from A to B with drivers that are happy to take them there. Right now, those are human drivers, and that's the biggest cost center for Lyft, is paying out these fares. If they were instead able to have a fleet of autonomous vehicles or some sort of licensed autonomous technology, what have you, to reduce what you're actually paying people and maybe have it spread over a fixed cost makes it a lot easier for a ridesharing business to become profitable.

Niu: Right, and it simplifies their operations so much. These companies fight with their drivers so much in terms of how they treat them, as far as contractors vs. full-time employees; if they're full-time employees, they have all these benefits you have to give. It's hugely complicated, trying to manage this driver base. Lyft now has 1.1 million drivers on the platform. So, yeah, autonomy is their way to cut them out. It's not good for those drivers' livelihoods, but that would be good for Lyft's bottom line. 

Lewis: It might be the only thing that's also proprietary about this industry. One of the things we look at is, getting from A to B is a commodity. The service is nice. You want to be giving money to a brand that you think is warm and fuzzy, Lyft or Uber, perhaps. But, if they were able to do this before other companies were able to, well, that'd be a huge advantage because they would have a fleet that is exclusively theirs. Right now, so many of the drivers that drive for Lyft also drive for Uber. 

Niu: Right, and that speaks to how commoditized all of this is. All drivers care about is just getting people to take the rides, and all the riders care about is price.

Lewis: Right. All right, we have one more question. This is from Josh. He asks, "What does the path to profitability look like for Lyft?" We did an overview discussion of some of the major costs. I think that that's probably where this conversation has to start. 

Niu: We just talked about the autonomous part of it. I think that's a big piece of it to me. I'm not interested in Lyft as it is right now because I don't think the numbers work out too great. Over time, if they can get this autonomous technology down, that would help reduce all the costs. But then also, like we mentioned earlier, the piece on the discounts and the true cost of these rides. Certainly, if you can reduce the cost of the rides in terms of autonomous car vs. a human driver, that would allow you to have cheaper prices, too. But that's not the reality right now. 

Lewis: Yeah. I think that there is room in the model for profitability, but it's going to be a big question mark. Maybe the goal with these types of businesses is to own certain geographies and dominate those markets. Once you've really established yourself as the provider in a specific space, you can slowly creep prices up. That might be a way to do it. But in the meantime, there's going to be a lot of discounting along the way, and if you stop doing that discounting, you might have a bunch of people defecting and going to other apps.

Niu: Right. And Uber has shown a willingness to burn incredible amounts of money just to have the lowest prices and grab as much market share as possible. That's put a lot of competitive pressure on Lyft. Lyft, in this filing, as a risk factor, notes how competitive it is, and how sensitive the riders are to the prices. When you don't have a lot of pricing power, you have a lot of costs, it's really hard to squeeze out a profit. Something you and I touched on earlier is on the safety front. I'm not a fan of these companies because I don't think they have as much safety regulations in place vs. traditional cabs. There's been lots of stories over the years about bad things happening. That's never a good thing. You want these platforms to be safe. But if you're losing all this makes sense that they're so resistant to being more rigorous with safety when they're already losing so much money, and it's going to cost even more to vet these drivers better. 

Lewis: Yeah. And as they try to become more profitable, try to eke more out by raising their fees or possibly raising their commissions, that's the kind of thing that angers the drivers, and that's the lifeblood of this business. Whoever has the biggest fleet is really going to be in the best position to capture most of the market. 

Niu: Yeah, exactly. I think they do have a lot of encouraging signs, in terms of the core rider metrics. But, there are a lot of concerns that I have in terms of the underlying economics and sustainability when you look at all these other angles. 

Lewis: Yeah. We will be following up on this once we get a firmer sense of where these shares are pricing and what valuation looks like. Hopefully that's a decent overview for right now. Evan, thanks for hopping on!

Niu: Thanks for having me!

Lewis: Listeners, that does it for this episode of Industry Focus. If you have any questions or you want to reach out and say, "Hey," you can shoot us an email at [email protected], or you can tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or check out videos from this podcast over on YouTube. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass and finally connecting me and Evan via video. For Evan Niu, I'm Dylan Lewis. Thanks for listening and Fool on!

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Dylan Lewis owns shares of GOOGL, AAPL, and PYPL. Evan Niu, CFA owns shares of AAPL and TSLA. The Motley Fool owns shares of and recommends GOOGL, GOOG, AAPL, PYPL, TSLA, and TWTR. The Motley Fool has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.

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