Fast-growing ride-sharing company Lyft is finally getting ready to hit the public markets. In its updated S-1 filing, the nation's No. 2 ride-hailing service said it would sell 30.77 million shares at a price between $62 and $68 per share, bringing in about $2 billion in cash that the company plans to use for working capital and general corporate purposes. The initial public offering would value the company at as much as $23 billion.
There are a number of reasons for investors to get excited about Lyft, whose shares are expected to begin trading on March 29. In addition to its being the first ride-share stock to hit the market, with Uber expected to debut later in 2019, the company revealed some eye-popping figures. Revenue in 2018 jumped 103% to $2.16 billion, following 209% growth the year before, and the company expects continued rapid growth as it works to disrupt the $1.2 trillion domestic transportation market. Its market share jumped from 22% in December 2016 to 39% in December 2018.
Lyft capitalized on industry-leader Uber's meltdown during a series of negative headlines and generally bad publicity, culminating in January 2017, when a #DeleteUber campaign swept the country in response to Uber's purported role in breaking a taxi strike at John F. Kennedy International Airport. Lyft made efforts to brand itself as a friendlier ride-sharing service, winning over quite a few Uber riders.
However, despite Lyft's blockbuster growth and market-share gains, there are a number of reasons why investors may want to avoid the IPO.
1. Lyft's losses are deep, and getting deeper
Profits have not followed Lyft's top-line growth. In fact, its net loss widened by 32.3% from $688.3 million in 2017 to $911.3 million in 2018. Though the company's net margin improved year over year from negative 64.9% to negative 42.2%, a near-billion-dollar loss can't simply be brushed aside.
The numbers make clear that Lyft spends heavily on sales and marketing to drive its growth. In 2018, it spent $803.8 million on sales and marketing, or 37.3% of total revenue; this was its biggest line item after cost of revenue, which is made up primarily of insurance, payment processing costs, hosting costs, and other technical expenses. Sales and marketing includes advertising expenses, rider and driver incentives, and refunds. Lyft has been aggressive in offering discounts to riders in order to keep them on the platform, and add new users; the company said that over the long term it expects sales and marketing expenses to decline as a percentage of revenue.
Though plenty of tech companies spend aggressively on sales and marketing while they're growing, Lyft would still have had an operating loss of $174 million without marketing expenses, leading to questions about the fundamental profitability of the business model. Backing out $300 million in research and development expenses as well, the company would have had an operating profit of $126 million last year.
Beyond its wide losses, the company also doesn't seem have a plan to deliver profits, at least not for the foreseeable future. Management acknowledged among its risk factors that the company may not be able to achieve or maintain profitability.
2. There are few barriers to entry
Lyft's ability to grab market share from Uber is a testament to the company's strength, but also highlights the fact there are few barriers to entry in the ride-sharing industry -- and ride-sharing doesn't easily lend itself to competitive advantages. There's little brand loyalty among riders, or even drivers, as many drivers work for more than one service.
Among its competitors, Lyft includes Uber, Gett/Juno, Via, and traditional taxicabs. The company also faces potential competition from traditional carmakers like General Motors (GM 4.03%), which is planning to launch its own autonomous ride-sharing service later this year, and Alphabet's (GOOG 1.56%) (GOOGL 1.90%) Waymo, which is generally considered to be the leader in autonomous-vehicle technology.
The competitive advantages that Lyft touts in its prospectus are its focus on purpose and people, the strength of its brand, its trusted relationships with riders, and its expertise in operating a ride-sharing network at scale. However, none of those factors seems to be enough to block competition, especially if autonomous vehicles continue to take over the industry.
3. Shareholders will lack voting rights
Lyft's co-founders Logan Green and John Zimmer will control nearly half of Lyft's voting rights, due to the company's dual-class structure: It gives Class B shareholders 20 votes per share, compared to just one per share for Class A shareholders.
Though such structures have become common in the tech industry, they can lead to abuses. Lyft's rival Uber experienced this with its ousted founder Travis Kalanick. In the social networking arena, many observers believe that Facebook founder Mark Zuckerberg has trampled over privacy rights, and is given little oversight.
Though there's no apparent reason for investors not to trust Green and Zimmer, their company is fast burning through cash, and it could have to make some difficult decisions in the coming years. Investors should be aware that due to the share structure, they'd have little say in the composition of the board or the company's direction.
Lyft's loss of $911 million last year appears to be the biggest ever for a company newly going public. Even with its blistering growth, the company has not been able to narrow its losses. Given those massive losses, a lack of sustainable competitive advantage, and few voting rights for shareholders, investors may want to wait on the sidelines -- at least until a clearer path to profitability emerges.