Ridesharing specialist Lyft (LYFT -3.89%) is growing fast. That impressive growth was the reason investors felt comfortable hoisting a $20-billion-plus valuation on the company when it went public last week. With revenue more than doubling in 2018, a price-to-sales ratio above 10 wasn't enough to scare investors way.
But selling dollar bills for 50 cents, in the hope that somehow, someday, everything will work out, is not a business model that I can get behind. Lyft posted a loss of nearly $1 billion last year on a little more than $2 billion in revenue. The company poured more than $800 million into sales and marketing, with an undisclosed chunk of that tied to incentives for riders and drivers to use the platform.
The hope is that the company's heavy spending becomes more efficient as it scales, with the need for incentives declining. Rider acquisition costs need to decrease substantially for Lyft to have any chance at turning a profit.
There's just one problem.
As moat-less as it gets
Lyft mentions competitive advantages in two contexts in its S-1 filing. The first one: "Focusing on purpose and people isn't just the right thing to do, it provides a lasting competitive advantage."
That sounds like nothing more than corporate fluff to me.
The second one: "Further, we believe that the strength of our brand, our trusted relationships with riders and our expertise in operating a ridesharing network at scale, as well as our two-pronged strategy to bring autonomous vehicles to market, will be competitive advantages that will enable us to capture value in the emerging autonomous vehicle ecosystem."
Lyft does have a strong brand, but I'd argue that it largely doesn't matter. There are likely some consumers who prefer Lyft over Uber, given all the scandals that have plagued the latter in the past few years. But ultimately, ridesharing is a commodity. A ride is a ride.
What that means is that price and availability are going to be the most important factors for most riders when choosing which ridesharing service to use, and compensation is going to be the most important factor for drivers. There are plenty of industries where companies have pricing power because of high switching costs, but ridesharing is not one of them. For riders, it's a simple matter of opening a different app. Even paying is mostly painless these days, with mobile wallets like Apple Pay and Google Pay eliminating the need to enter in credit card information multiple times.
For drivers, it's also a simple matter of switching apps. Drivers will use whatever app provides the best compensation and most opportunities for earning.
What about network effects? Lyft can certainly benefit from a network effect in each individual market, but it does not enjoy a broader network effect. Here's what I mean: If Lyft is dominant in a particular city -- say, Dallas -- both riders and drivers in that city are likely to flock to the service over its competitors. It would take heavy spending in the form of incentives by a competitor to wrestle away market share. Each city could end up being winner-take-most in the ridesharing market.
But being popular in Dallas doesn't mean anything in Cincinnati. Each market is its own distinct battleground. Lyft winning in some places doesn't give it any advantage in others. And even that local network effect isn't all that meaningful. If Uber wants to boost its market share in a certain market, the amount of money required relative to the scale of Uber just isn't that big.
What about Lyft's autonomous car strategy? Hoping that a technology that doesn't yet exist will provide a competitive advantage is not a competitive advantage.
Lyft provides a commodity with no switching costs and enjoys minimal benefits from scale in the form of network effects. It has very limited pricing power, and it's losing heaps of money despite controlling somewhere around 30% of the ridesharing market in the U.S.
Yeah, it's growing fast. But I don't think growth is the solution to most of Lyft's problems.