Stock of the week: Lyft

Summary:
- Lyft to debut on Nasdaq on Friday, 28 March
- First ride sharing company to go public
- IPO price set at $72 per share, 32.5 million shares to be offered
- Regulatory risks on the horizon
- Lyft shares and CFDs will be available in xStation5 under symbol LYFT.US

For decades people had a few means to travel swiftly inside cities. In case one did not have his own car, he had to rely on public transport like buses or private transport services like cabs. However, a lot has changed during the past decade in this field, mainly on the back of the broad adoption of the ride sharing services. Lyft debuts on the Nasdaq today as the first such company in the world. In this analysis we will take a look at what helped ride sharing companies win market share from cab corporation and what risks investors should pay attention to.

How it all began?

Logan Green and John Zimmer, two US entrepreneurs, set up a company named Zimride in 2007. Aim of the project was to provide long-distance ride sharing services. The service was well received by the US community, especially students of the US universities. However, a few years later the two businessmen decided that it may be better to provide community with service they need on a daily basis rather than once or twice a year. In turn, Zimride was transformed into Lyft and ride sharing services focused on trips within cities. Lyft currently offers 6 types of services that differ in relation to cost of services, type of car used or experience of the driver. What one may find interesting is the fact that Uber Technologies (most famous ride sharing company in the world) actually copied part of Lyft’s business strategy. In its early years Uber offered only rides in luxury cars and professional drivers but decided to expand into more affordable options once it saw that launch of non-luxury ride sharing services by Lyft hit its market share in the United States.  

Lyft is still burning through cash but one sees that net loss is shrinking at a faster rate than the revenue grows. Nevertheless, the company booked around 40 cents of losses out of each dollar of revenue in the final quarter of 2018. Source: Bloomberg, XTB Research

Advantage over cab corporations

One can argue that private transport services were already available in cities through cabs and wonder where companies like Lyft or Uber get their edge from. Ride sharing companies may offer lower fares due to their business model. As a bulk of ride sharing companies employ drivers as individual contractors rather than contract workers, they are not required to pay social security or health care contributions. Such expense management positions them better in comparison to taxi corporations. Moreover, in many major US cities taxi drivers or corporations are required to hold a taxi medallion for each cab they operate. As the supply of such medallions is usually limited, their prices used to be high in the past. Price of a single medallion in the New York City was close to $1 million in 2013 before it started to drop on the back of broader adoption of ride sharing services. It is around $200k currently.

Potential regulatory action may hit results

However, the very same arguments that we used to describe ride sharing companies’ advantage may turn to be a drag for those companies in the future. As both ride sharing and cab corporations offer virtually the same services, it seems likely that the regulatory approach to both business models will become more uniform over time. Requiring license may effectively kill Lyft’s business depending on how such licenses would be specified. Ride sharing companies suffer from high drivers’ turnover therefore issuing driver-specific licenses could be disastrous. The same can be said about vehicle-specific licenses as some of Lyft’s drivers use their own vehicles and in such case Lyft would lose the license once the driver departs. Licenses that can be used by all of Lyft’s drivers or vehicles would have the smallest negative consequences for the company, but as we wrote before supply of such licenses is likely to be limited in order not to overcrowd the market and that may hamper Lyft’s expansion. On the other hand, regulators could scrap the requirement to hold medallions by cabs but it would allow taxi corporations to charge more affordable prices and in turn they could regain some of the lost market share within major cities. Regulatory action could also be taken in relation to employment practices. If this is so, the cost advantage ride sharing companies had over taxi corporations would diminish.

While Uber still holds the position of a leader on the US ride sharing market, Lyft managed to capture some of its market share during the past year. As one can see, the US ride sharing market is dominated by Uber and Lyft that held combined share of 96.8% in February 2019. Source: Second Measure, XTB Research

Challenging valuation

As we have already outlined advantages Lyft has over cabs and risks to its future outlook, the truth needs to be said - ride sharing companies in the US are not profitable. Neither Lyft, nor Uber made any profit so far and ride sharing companies in other parts of the world, like Asia or Europe, also struggle to be profitable. Low fares allowed them to grow and win market share from taxi corporations but turned them into entities burning loads of cash. The bright side is that economies of scale begin to work - revenues are increasing faster than costs -  suggesting that profitability could be achieved sooner or later. However, whether it happens or not may be to huge extent dependent on the approach of regulators as we wrote in the previous paragraph.

Lyft debuts on Nasdaq stock exchange on Friday, 28 March. The company offers 32.5 million common shares with a $72 price tag. Lyft shares as well as CFDs on these shares will be available in xStation5 since the first trading day under the symbol LYFT.US.