LYFT’s IPO Raises Questions (Chart Of The Day 20)

LYFT’s IPO Raises Questions

 

LYFT’s IPO priced at $72 on Thursday night implying a pre-trading valuation of $22 Billion Dollars.  Only weeks earlier the value range was thought to be between $10-$15 Billion.

LYFT’s first trade  was $87.24, just shy of a $27 Billion value. Trading went straight downhill from there, with the stock closing at $78.29.

For a company that lost nearly $1 Billion in 2018 and may NEVER be profitable, the valuation is very hard to understand. Proponents view this as another Amazon, with early losses necessary to capture market share.  Year-over-year revenue growth was HUGE, 100%.  The revenue growth, unfortunately was coupled with a 37% INCREASE in losses from 2017.  (https://www.sec.gov/Archives/edgar/data/1759509/000119312519088569/d721841ds1a.htm).

UBER, LYFT’s chief rival, was thought to worth be $75 Billion.  However, that number likely now exceeds a mind boggling $100 Billion.  UBER is currently losing more than $3 Billion annually.

Contrary to Lyft’s Claims and Advertisements, Drivers Make Very Little

LYFT, in order to recruit drivers, has promised $20-$25 per hour with a slew of various bonuses.

These claims by the company are not consistent with the facts.   LYFT’s drivers make LESS than $15 per hour on average and then have to cover gasoline, insurance, and maintenance.  Another important consideration is the accelerated depreciation the drivers bear as the result of stop and go driving and the high mileage they put on their vehicles.

By the time one considers the costs, average hourly rates are well below $10 an hours, perhaps MUCH less.

Recently, in Los Angeles, LYFT and UBER drivers went on a 25 hour “strike” to protest the horrendous pay, based in part, on an announced UBER pay cut of 25%.. (https://www.nbcnews.com/news/us-news/uber-lyft-drivers-los-angeles-strike-over-pay-working-conditions-n987276).

LYFT drivers now earn 79 cents per mile and 11 cents per minute.  LYFT charges roughly $2.50 per mile.  This means that drivers now earn about 50% to 60% of the revenue.

As a result of the low pay rates, UBER and LYFT driver turnover is very high, with very few even driving for one year.  With the reported pay cuts, UBER driver turnover may become MUCH higher since the pay is now not nearly enough to provide for even a modest living.  UBER is just as guilty of exaggerated claims of driver pay as LYFT.  At one point, it claimed that New York drivers earned an average of more than $90,000 per year with flexible hours.  Independently gathered data shows numbers closer to $30,000 per year or LESS.  (https://slate.com/business/2014/10/uber-driver-salary-the-ride-sharing-company-says-its-drivers-make-great-money-but-its-math-just-doesnt-add-up.html).  (https://www.ridester.com/2018-survey/).

LYFT’s Business Model May Be Completely Unviable

LYFT’s greatest hope is that it can introduce autonomous driving vehicles and eliminate most of its drivers.  Unfortunately, Tesla, considered the leader in autonomous vehicles, has had a slew of fatal crashes while in robot-driving mode.  The horrendous publicity has made the public very skeptical of autonomous technology.  Recent surveys indicate that only about 20% are comfortable with this new technology.

In addition, growth is limited to large cities.  Smaller communities have shown to be horrendous money losers.  LYFT drivers are better off working at McDonalds or Walmart than earning the pittance that LYFT now pays.  The inevitable loss of drivers may substantially limit growth by creating queues for its passengers.   It then becomes highly likely that LYFT will have to RAISE driver compensation just in order to remain in growth mode.

LYFT operates is 300 cities mostly in the United States and a few in Canada.  UBER, on the other hand, only operates in 100 cities spread around 45 countries.  UBER services only large metropolitan areas whereas LYFT operates in communities with as little as 100,000 in population.  (https://www.biggestuscities.com/).

Another issue is the apparent lack of scalability in LYFT’s business model.  In fiscal 2017, fixed and developmental costs such as marketing, operations support, and General and Administrative costs totaled $1.1 Billion or a stunning 105% of revenue.  By comparison, in 2018 those same costs were $1.9 Billion or 87% of revenue.  It is concerning that the fixed costs rose almost as quickly as revenue growth.  If that trend continues, LYFT will be a money loser into perpetuity.

Shareholder Unfriendly Voting Power

LYFT’s two founders, hold Class B shares.  The offering Friday was for Class A shares.   Class B shares allow the founders 20 votes per share, while Class A only provides for 1 vote per share.

Following the offering, there are 12.7 million B shares and 271 million A shares.  The founders now own 4% of the outstanding shares yet maintain 49% of the voting power.  In addition to the obvious lopsided power that remains in Class B, many institutions and pension funds are precluded from ever buying into such a shareholder unfriendly structure.  Class A shares will have absolutely NO SAY in the governance of LYFT.

GrubHub is the Most Comparable Public Company

 

GrubHub (GRUB) has been public for more than 5 years.  The company delivers food from local restaurants.  It has a similarity to LYFT in that GRUB operates a dispatch system to its drivers.   GRUB employs independent contractors who ferry meals rather than passengers.

GRUB is profitable with terrific growth in revenues.  The company reported revenues of $1 Billion in fiscal 2018 double that of fiscal 2016. Oddly enough, GRUB reported operating income of about $85 million in 2016 AND 2018.  The company’s market value is “only” about $6 Billion or 6 times revenue. (https://finance.yahoo.com/quote/GRUB/financials?p=GRUB).

Were LYFT to trade at 6 times revenues, it’s value would come in at $13 Billion, or midway of its value range indicated just a couple of months ago.

GRUB’s drivers earn about $12 per hour according to a recent survey of its drivers.  (https://www.glassdoor.com/Hourly-Pay/Grubhub-Delivery-Driver-Hourly-Pay-E419089_D_KO8,23.htm).  However, GRUB drivers do earn substantial tips, which is normally 15%.  LYFT drivers, on the other hand, earn about an extra $1 per hour, according to substantial anecdotal evidence.

Does All This Make LYFT a Sell?

Not necessarily, but certainly a stock to avoid.  If the stock market is entering Bubble mode, as we have speculated, LYFT could go MUCH higher in the near term.  At this point, there is no trading data except for Friday.  UBER is expected to go public in the next few months, so the enthusiasm for the “Ride Hailing” sector may give LYFT some lift. “Federal Reserve Stokes Another Asset Bubble”.  (https://markonomics101.com/2019/03/22/federal-reserve-stokes-another-asset-bubble/).

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