Not So Deep Dive: Lyft Stock (Ticker: LYFT)
Can an Amazon veteran turn this disruptive start-up into a sustainable business?
Reminder: these are show notes that should be read in conjunction with the podcast. Do not expect these notes to be a polished research report. Enjoy the episode!
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Show Notes
(Ryan) What they do: Lyft is a ridesharing marketplace that competes directly with Uber. This means that people can use their car to join the Lyft network and offer rides to anyone who needs them. In exchange, riders pay a fare each time and Lyft takes a 25% cut. This ridesharing marketplace is the primary driver of Lyft’s business, and within the US, Lyft’s market share is estimated at ~29% with Uber accounting for the remainder. The company does offer a couple of other products/services, of which some are pretty complementary to the core business.
Express Drive: This is a rental car program for drivers who don’t have access to a Lyft-qualified car.
Lyft Rentals: This is a similar service to Turo. It allows consumers to rent cars for long trips instead of being driven around.
Light Vehicles: Bikes and Scooters. The economics of this business are quite poor.
Lyft Autonomous: They have an autonomous driving partnership with a company called Motional that basically has a couple autonomous cars driving on the network in Las Vegas.
Lyft Pink: This is their membership program for $9.99/month. You apparently get faster pick-up and savings on Lyft Lux.
Insurance: Lyft legally has to insure a couple of things. First, it offers drivers some insurance in cases where they may not have it. “Lyft maintains third-party liability insurance for covered accidents if your personal insurance does not apply”. But it also has to have insurance for its scooters and bikes. They’ve had to consistently increase their insurance reserves which has led to worsening cash flow.
(Ryan) History: A couple years before 2008, a student at UC Santa Barbara named Logan Green started a car-sharing service for students trying to commute from big cities. I’m not entirely sure how the original business worked but it sounded like it was basically, an app for finding someone to carpool with. A few years after launching that service, a Lehman Brothers financial analyst named John Zimmer got connected with Green and the two began building a service called Zimride when Zimmer wasn’t working. In 2008, Zimmer decided to leave his job at Lehman and join Zimride full-time.
By 2012, the platform was quite popular across college campuses and was home to thousands of users. Apparently, they had the realization that a long-haul car-sharing service wasn’t enough and they wanted to begin moving to shorter rides (Uber was already around by this point), so within a few weeks they built the app that would eventually become Lyft. At the time, any driver who joined the Lyft network would receive this big pink fuzzy mustache to put on the front of their car and the platform began to grow. By the end of the year, they officially changed their name to Lyft and after a couple of years sold the initial Zimride business to the owners of Enterprise. From there, the funding quickly began to flow in. In total, Lyft raised $4.9 billion in private funding over 28 rounds, then IPO’d in 2019.
Since its 2019 IPO, the stock is down ~85% and the company is now pretty much in turnaround mode with a different management team.
(Brett) Industry/Landscape/Competition:
Lyft operates in a disruptive but somewhat simple industry: taxis and ridesharing
Making it even more simple, Lyft is only operational in North America and unlike its main competitor, does not do anything with food/retail delivery.
Backing into a number using Lyft’s 2022 revenue, a 20% take rate, and a 26% market share for Lyft (around what third parties estimate) the ride-sharing market in North America was $78 billion in 2022. Do we think ride-sharing gross bookings in North America will be significantly higher in five years?
The main competition is Uber, with this being a duopoly market. Uber has an estimated 74% market share in North America.
However, you could argue that Lyft more broadly is competing with all forms of the ways people transport themselves around (public transportation, individual cars, rental cars, other vehicles) if you view it as ride-share vs. the incumbents.
If you are really interested in the competitive landscape, I would take a look at Turo’s S-1 financials. The car rental platform is growing quickly. Lyft has failed to grow in this niche of the transportation sector.
(Brett) Management and Ownership:
Lyft has finally gotten the co-founder’s out of the operations with David Risher taking over as CEO. If you have heard the story about Risher in the media/conference calls, he used to be a big VP at Microsoft and then left for an early position at Amazon. His track record of building platforms/products is very strong and is likely why he got the position at Lyft. He officially joined Lyft in April of 2023 so only a few months at the helm.
There has been some executive turnover since Risher joined the team, which isn’t too unsurprising given this is a bit of a turnaround story. The CFO – who was actually an Amazon exec before joining – has left the company along with some other people like the head of rideshare. Currently, they have three executives according to the IR page: Risher, a president who has been with the company since 2012 (but not all as president), and a CFO who just joined the business.
The executives are heavily compensated with stock options and performance stock units. This has been a headwind to per-share value creation as shares outstanding are up 33% since going public in 2019.
The most interesting part of the executive compensation is Risher’s fully-performance-based stock unit package. Essentially, if Lyft stock goes up by 8x he will be gifted shares that will make him a billionaire:
*Based on shares outstanding as of latest proxy filing
(Ryan) Earnings:
$4.2 billion in TTM revenue (+21%)
30% gross margin
($1.4) billion in operating income or -33% operating margins
Most Recent Quarter:
Revenue growing 14% YoY
($188) million in net income
($74) million in operating cash flow. Spending $180 million in SBC and building up their insurance reserves.
During Q1, active riders grew 10% and for the first time in 2 years Lyft’s market share reportedly expanded.
The focus of management right now is bringing down prices to be on par with Uber and hopefully get riders back on the platform. This is hurting the contribution margin.
Quote from CFO on SBC: “Our stock-based compensation cost will be roughly $550 million in 2023 and $350 million in 2024, down from approximately $750 million in 2022.”
(Ryan) Balance sheet and liquidity:
Assets:
$1.75 billion in cash and short-term investments.
$836 million in restricted investments. (most of these are longer-term debt securities)
Liabilities:
$793 million in long-term debt
Pretty much all the debt is in convertible senior notes due in 2025 that pay 1.5% interest.
They’ve done a good job managing their balance sheet (pretty easy when you’re handed $4.9B in private funding), so they now generate about $120 million in annualized interest income.
(Brett) Valuation:
Market cap of $4.4 billion
Enterprise value of $3.5 billion
EV/GP of 2.9
Anecdotal Evidence:
(Ryan) I used to just price compare every time I was looking for a ride, but after a year or two of Uber having lower prices, I just go straight to Uber every time. Maybe that’s why management feels like they have to do some marketing around the fact that they’ve lowered prices.
(Brett) I have Lyft downloaded but I’ll go to Uber first. Nothing against using Lyft though and I’ll usually check both and do lower price / closest pickup combo
Future growth opportunities:
(Ryan) I wish they’d dispose of their scooters and bikes business. At this recent conference, Doug Anmuth did this word association exercise with Risher and he said “Bikes and scooters”, Risher responded, “Love it as a customer, working on it as a business”.
(Brett) Since the company has streamlined most of its operations to core ridesharing in North America, it is difficult to pinpoint an exciting growth opportunity. This is the opposite of Uber (a stock we/ve covered in the past) which seems to have ambitions to be the everything app for transportation/delivery. However, I will say that Risher seems bullish on the E-bike opportunity or their network. If (this is a big if) they can solve the deprecation problem for bike/scooter sharing that could be a solid business.
Highlights and lowlights:
Ryan’s Highlights:
There is some brand notoriety here. Millions of people still check the app so if Lyft does do something to differentiate themselves, it should get noticed.
Tons of cash on the balance sheet, so they do have some time to figure it out.
I like David Risher. He seems quite honest and has good incentives.
Ryan’s Lowlights:
I would not want to be David Risher. If you raise prices, you lose volume. If you lower prices, maybe you raise volume, but your contribution margin shrinks and you have to cut costs across the company to make up for it.
Paid Elaine Paul $16 million in stock to join the company as CFO in 2022. Hired a new CFO 2 months ago.
I don’t think Uber has any interest in trying to kill off Lyft.
Brett Highlights:
The competitive set in the United States is set for ride-sharing with Uber/Lyft at around 70/30 for bookings, give or take. I would think this market sees steady growth this decade.
The new CEO seems to have cleaned house, has a solid track record of growing successful business units, and is incentivized heavily to get the stock price up this decade.
Brett Lowlights:
The problem with my first highlight is it has no bearing on how profitable Lyft the company will be. If they have to “run in place” to maintain a 30% market share while not generating per-share value for shareholders is this really a viable business?
The flipside to my second highlight is that we don’t know why there has been so much executive turnover. Is Risher trying to get rid of the low performers and reset the bar/culture? Or is this a dumpster fire only getting worse? This is very difficult for us to know as outsiders right now.
The AV risk from Waymo/Google feels underrated to me, plus other AV start-ups.
Bull Case:
(Ryan) Let’s use Uber as a comp. Uber reports that it has a 25% segment Adj. EBITDA in its mobility segment. Now that isn’t anywhere near its real margins, but let’s assume it’s doing 10% real EBIT margins there. If you think Lyft can get to half of that (5% EBIT margins), they’d be generating probably around $300 million in net income a year. Today, they have an EV of ~$3.9B, so it’s trading at a low-teens theoretical earnings multiple. It’s easy to see how this could be a good investment, but I’m not sure what the path is to get to that level of profitability.
(Brett) With a set 70/30 market, Lyft seems to be back to reacting to Uber’s pricing and trying to match it again. While this puts them at the whim of Uber, Uber is almost assuredly not going to want to put Lyft out of business (need a second competitor) and Lyft can ride Uber’s price increases, which they seem to have done in recent years. We could also see this business run fairly profitably if they really gut the employee base as the company generated $1.2 billion in gross profit in 2022.
Bear Case:
(Ryan) They just tread water for a long time. Hard to see how they start generating consistent profitability, when they’re basically the place people only go if they have a cheaper ride than Uber.
(Brett) If they keep gross margins steady at 30% (this includes operations and support), grow revenue at a 25% average for the next three years, and keep operating expenses flat after taking out $330 million this year (which is what management is guiding for), they will be break even in 2025. Where does the stock trade if this occurs?
More or less interested?
(Ryan) Less interested. Obviously, lots of upside here if they solve for profitability but it’s just hard to see how that would happen. I don’t think there’s a whole lot of customer loyalty in this business despite what management has said.
(Brett) Less interested. This is an industry where I would want to own the leader at the right price, not the second player. As well, I worry about the disruptive threat of autonomous vehicles, which seems like a known threat that is very unpredictable.
Stock for next week? (WeWork)
Sources and Further Reading
Q4 2022 earnings: https://s27.q4cdn.com/263799617/files/doc_financials/2022/q4/lyft-q4-2022-earnings-supplemental-datafV.pdf
Recent WSJ article: https://www.wsj.com/articles/inside-lyft-ceo-david-rishers-efforts-to-bolster-the-company-2f20f807
Pitches on VIC: https://www.valueinvestorsclub.com/search/LYFT