- Lyft staged its much anticipated initial public offering on Friday.
- The ride-hailing service has been growing, but it’s also losing money. Lots of money.
- To reverse the losses, Lyft needs to grow outside urban areas and persuade customers to stop owning personal cars.
- Americans in rural and suburban areas will never stop owning cars, so Lyft has no path toward profits via this route.
At the end of trading on Friday, Lyft could be worth somewhere around $US21 billion, after its much anticipated initial public offering priced at $US72 a share. Lyft started trading at $US87.40 a share upon its debut on the Nasdaq.
Investors ranging from Silicon Valley venture firms to General Motors and Lyft’s founders are set up for a nice return. But once the warm glow of wealth fades, the unprofitable Lyft will have to figure out how, if, and when it will make money.
Ride-hailing services such as Lyft and Uber have grown rapidly, but that growth has depended on displacing taxis in urban areas, as well as jamming cars onto already congested urban streets and creating a never-ending traffic crisis for residents of cities like New York.
A key theme that’s emerged – or more accurately, reemerged, as it was often discussed in the years before Lyft and Uber were founded – is de-ownership of personal cars leading to rampant ride-hailing adoption outside big cities. Presto! Profits!
You could argue that until self-driving vehicles arrive and eliminate Lyft’s labour costs, de-ownership is the company’s only hope. Perceptions of the trend, and optimism about its prospects, are driven by the oft-cited disdain that young people have for owning cars.
De-ownership is a sucker’s bet outside big cities
Those ownership-disdaining young’uns mostly live in big cities, however, where having a car has never made much sense. Believe me, as someone who owned four cars in New York City, you’re talking about a commitment. Lyft built a business on this relatively easy money – admirably in the face of cutthroat competition from Uber.
I’m not a betting man (my last shot at a poker night left me broke in two hours), but if I were, I’d bet against Lyft ever making money on the idea that people will give up their personal cars outside the urban Northeast and San Francisco. This is because although owning a car is costly, it’s also convenient.
It isn’t convenient in New York City, of course, but it never has been. Hence the popularity of taxis and “black cars” for decades before Lyft showed up. But everywhere else, if you have the means, you put a car in the driveway and deal with it. That’s why we’ve seen in the US four consecutive years of new-car sales topping 17 million units – about 70 million vehicles in total (many of them, I’m sure, cars bought or leased by Lyft drivers).
A rational analysis of Lyft’s business would note that the company has created a large user base at a time when auto sales have surged in the US. The conclusion should be that Lyft obviously isn’t killing the desire of Americans to own vehicles but rather drinking the taxi business’ milkshake.
A classic IPO strategy
Perhaps marginally, you have some Lyft users who don’t live in Manhattan and use the service. I’m one of these people. I have a nondriving teenager and periodically need to drop my car off at a dealership for service, or I need to get around in another city. But even though I test new cars for a living, owning a personal vehicle is more than worth it for me.
I don’t think there’s any way Lyft will expand these margins. To do so, it would have to reduce new-car sales in the US, not just from today’s record levels but far below what the industry calls the “replacement rate” – about 15 million vehicles a year, the churn of old cars being swapped out for new ones. And by “below the replacement rate,” I mean WAY below it. With its market cap, Lyft has about two-thirds the value of Ford ($US33 billion).
This sets up a near-classic IPO move. The early investors in Lyft bet on growth, and growth they got. They didn’t bet on profits, and now they get their payout minus positive margins (Lyft’s cap will probably hold up through the lockout period, at which point I expect early investors to exit). So from now on, every dollar that goes into Lyft stock is an option on de-ownership outside major US cities.
Even if this isn’t a bankrupt option, suburban and rural de-ownership could take decades to appear, if it appears at all, and it won’t. Lyft’s other problem is that it is likely to find itself in the position of being the lesser Uber, constantly vulnerable to Uber’s aggressive pricing strategies. Eventually, with Uber taking something like 70% market share and Lyft clinging to 30% (speculative figures, but consistent with recent estimates), Uber will just outspend Lyft into a deep, deep hole (unless Uber collapses under its own challenging cost structure).
Maybe some savvy investor can tell me how this will all work out great for Lyft and rescue the dumb money that might now pile in. But I’ve covered cars and the car business for a long time, and if you asked me to design a perfect capital-obliteration company in transportation, I couldn’t come up with anything better than what Lyft already is.
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