The formula for running a successful business generally isn't a complicated one. As long as your revenue exceeds your costs, you're turning a profit. That's easier said than done, though. Just ask the folks running ride-hailing outfit Lyft (LYFT -3.35%).
Although its customers love Lyft's service and the company still has some hopeful shareholders, Lyft's balance sheet remains in the red, with no end in sight. It's not too soon for investors to start asking tougher questions about the viability and longevity of its business model, particularly as long as much-bigger rival Uber Technologies (UBER -2.94%) remains in the picture.
One of these things is not like the other
As the old adage goes, a picture is worth a thousand words. Take a look at the chart below. Lyft has successfully scaled up its reach and revenue. But, its cost of revenue, selling and administrative expenses, and spending on research and development has grown just as much, keeping the company in the red with the exception of a brief reprieve in the latter half of 2021. Last quarter's expenses exceeded revenue by the most since late 2020, when we were in the throes of the COVID-19 pandemic. Note the big surge in its cost of revenue (or cost of goods sold). This is at least partially linked to greater spending on driver recruitment and compensation, though gas prices also impact this expense.
Data source: Thomson Reuters. Chart by author. All figures are in millions of dollars.
But wait a minute -- didn't Lyft report record-breaking earnings before interest, taxes, depreciation, and amortization (EBITDA) in the second quarter? It did. Except, that swing to a strong EBITDA was only the result of a one-time benefit related to changes in the way its required insurance coverage is booked. If you take that benefit out, Lyft remains in the red on its income statement as well as on a cash flow basis.
Regular losses aren't necessarily unusual for a young company en route to success, mind you. It can take time -- and a good deal of money -- to get a business up and running.
That's not often the case with an operation as simple and straightforward as ride-hailing, though, particularly when Uber not only paved the way but provided a public snapshot of how it spends its money. Here's a detailed look at Uber's quarterly expense breakdown for the past three years.
Data source: Thomson Reuters. Chart by author. All figures are in millions of dollars.
Notice that Uber's costs directly linked to providing service to riders is almost as big as Lyft's, consuming 63.8% of its revenue versus 64.6% for Lyft. No surprises there -- the two companies must be competitive with one another on this front. Research and development costs are where Uber is really saving money, but Lyft isn't. If Lyft could pare down its spending on these two items to Uber-like levels, it's got a shot at getting and staying in the black.
Lyft is un-ownable until this happens
As was noted, though, curbing costs is easier said than done. Lyft is roughly one-tenth the size of Uber, but that doesn't inherently mean all of its costs are scaled back to one-tenth of Uber's. For example, rent payments on a corporate headquarters building are the same whether that tenant serves a million customers or a billion customers. There's also a minimum number of employees needed to manage a business regardless of how much revenue it is or isn't generating. That's why greater scale is generally a good thing, leading to stronger profit margins.
The explanation of Lyft's ongoing losses, however, means little to shareholders who have the right to start asking tougher questions. Chief among those questions is, how is the company going to achieve much-needed scale as long as Uber's in the picture? Another question is, barring achieving an Uber-like scale, where is Lyft going to cull more of its costs?
To its credit, Lyft is slowing its hiring, but the budget cuts mentioned back in May don't seem to have taken any meaningfully evident shape yet. That's particularly concerning with the potential for a full-blown recession on the horizon, in that economic weakness could easily crimp demand for ride services.
So, connect the dots here. Lyft hasn't yet made a believable case for revenue being greater than even its most basic of expenses at any point in the foreseeable future. The fact that the stock's hanging just above its record lows reached in June underscores this bearish argument. Listen to what the market is telling you, and steer clear of this ticker, at least until spending starts being reeled in. Most of that cost-cutting is likely to take shape with administrative and R&D spending, so look there first.
