We Need to Talk About Lyft’s IPO — is the Stock Worth It?

It’s official: Lyft’s valuation is at $25 billion. Released on March 29th, 2019, Lyft immediately popped up by 20% with some moderate investor interest. While it wasn’t the momentous occasion some investors hoped that it would be, it may signify some good things for the company moving forward. Unfortunately, there’s a lot of insecurity that rests inside of Lyft’s otherwise positive fundamentals.

Despite Lyft’s impressive valuation, everyone knows that the company is actually the underdog. In the past, ridesharing rival Uber has been estimated at a valuation of $76 billion. It’s expected that when it hits the market, Uber may go for a valuation of $120 billion. Lyft has raced to get to the market before Uber, and Uber is being held back by a large sequence of controversies.

Uber is the more diverse company, with services such as Uber Eats that allows the company to hedge its bets. Yet, with neither company currently being profitable, being the larger business actually just means that Uber is losing money faster in order to control more of the market. And that’s a big deal for an industry that’s still struggling to develop its profitability.

Investors purchasing into Lyft are investing in not only a pre-profit business, but a pre-profit business model. Ridesharing companies have not been able to achieve profitability yet. Instead, they have been fighting it out to increase their market share. Both Uber and Lyft are interested in controlling the eventual industry that emerges.

However, the question is whether that industry exists. Self-driving cars are already making great strides within the industry, with some self-driving buses already hitting the roads, and Lyft itself already maintaining a test fleet of self-driving vehicles. Yet self-driving cars cannot become popular in fleets until it’s proven that they’re safe, and it’s possible that city initiatives could bring self-driving buses and public transportation to cities before private initiatives do.

Autonomous cars could save both Uber and Lyft, because they reduce many of the risks associated with the industry. At the same time, they don’t save the company as much as it might seem. Today, the company offloads most of its maintenance and infrastructure costs to the drivers, in terms of vehicle maintenance. A move to autonomous cars would mean labor wouldn’t need to be paid, but maintenance and infrastructure would be.

So…what is Lyft’s greatest risk? That’s easy. Profit.

If Lyft can’t find a way to boost its profits, it will eventually run out of money. This IPO indicates that Lyft does have an interest in shifting towards profitability, but it remains to be seen how. Either it could try to take on more market share and then boost its prices (something that relies upon Uber also raising prices to be successful), or it needs to pivot.

Then, there’s regulation. Lyft and Uber have both continually fought with local regulators, from being kicked out of airports in certain areas, to fighting it out with taxi cabs in major metropolitan areas. With some areas, such as California, taking action to name gig workers as actual employees, the future of regulation is uncertain.

Finally, there’s the technology issue. At its core, Lyft and Uber are about disruptive technologies. Both Lyft and Uber are likely intending to leverage their infrastructure to pivot into another area, almost definitely autonomous cars. However, this is a gamble: it depends on how quickly the technology becomes readily available, as well as whether individuals are willing to embrace it.

Disruptive investments are appealing for a very specific reason: they can either go very right or very wrong. If Lyft and Uber are correct, they are going to move into a unique space, developing out the future of passenger transportation. If they’re wrong, they could be cut short by regulations, or even by public transportation running in similar directions.

Even accepting the rideshare premise, the question remains: is Lyft or Uber the stronger candidate? Uber is unquestionably the larger candidate, but it hasn’t been able to stay out of the news for controversial issues for longer than a couple of months. Uber appears to have a toxic company culture, while Lyft has remained healthy throughout. Whether that will establish profitability is another question.

Regards,

Ethan Warrick
Editor
Wealth Authority

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