By on April 2, 2019

Despite playing host to what everyone presumed would be a very hot property, Lyft’s IPO hasn’t panned out as expected. While the company’s Friday stock debut was strong, April 1st was less promising, with Lyft’s share price slipping by nearly 12 percent in a single day. It’s now well beneath the target price, casting doubts about the financial sustainability of mobility firms.

It’s a complicated issue. Lyft was valued at more than $22 billion when it went public last week, but investors are concerned with the company’s inability to turn a profit. Last year, the ride-hailing giant posted a net loss of nearly $1 billion. With Uber likely to announce its own IPO soon (and likely face similar headwinds), many are concerned. 

While the issue of profitability is an important one, it’s not the only reason the company is having trouble trading. Ride-hailing firms are no longer novel and people are starting to point out the downsides. Environmentalists and city planners are becoming increasingly concerned that the sudden influx of Uber and Lyft vehicles in urban areas have contributed to traffic congestion and pollution in a big way. Studies also indicate that these companies have syphoned many customers away from public transit.

However, that might also be ride-hailing firms’ biggest asset. Both Lyft and Uber are expanding rapidly and seeing more riders every single day. And all that growth has turned out to be expensive. Neither company has a clear path toward becoming profitable. While both have suggested deploying autonomous vehicles, reducing the need for independent contractors and their cars, development of the technology has proven extremely costly and not nearly as simple or swift as the automotive industry once predicted. As a result, public trust that AVs will be dependable, safe, and useful hasn’t improved much.

In the lead-up to Lyft’s IPO, many claimed companies of its ilk are severely overvalued, which isn’t terribly uncommon in the tech sector. But going public changed things. Rather than leaning on venture capital and positive press, Lyft is going to have to start appeasing its shareholders — which opens up a pandora’s box of issues. They’re going to be less willing to support the company if it continues losing money and, based on its long-term aspirations, losing money is likely to be par for the course for a while longer.

CNBC cited Michael Ward, an analyst at Seaport Global Securities, initiating coverage of the stock with a sell rating and a 12-month price target of just $42 a share. Lyft priced its IPO on Thursday evening at $72. Ward’s price target suggests a 39.1 percent reduction from Monday’s close of $69.

“In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service,” he said, adding that his personal belief is that people will continue to own cars and lean upon ride-sharing services as a “convenient supplement.”

“While we believe the ridesharing market will continue to grow and expect Lyft to be a prime competitor, in our view, current valuations reflect an overly optimistic view of consumer behavior in the U.S.,” Ward concluded.

Nobody really knows if Uber and Lyft will fizzle out, replace taxis entirely, or become so prevalent that they effectively replace public and personal transportation (doubtful). But many agree that both will have to adjust their pricing to become profitable — an interesting situation, considering their competitive cost and convenience are what gave them an edge over cabs, while helping the disruptive startups lure passengers away from trains and buses.

[Image: Jonathan Weiss/Shutterstock]

 

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21 Comments on “Lyft IPO Makes a Splash, Followed By a Flop...”


  • avatar
    NG5

    I have yet to see any believable argument as to how these services can ultimately surpass the cost efficiency of cab companies, unless they purely rely on drivers dumb enough to work for less than their car maintenance and fuel costs. As far as I can tell (and I’m no expert), as soon as they stop subsidizing fare prices with investor cash, they’ll be just as expensive as cabs, or likely even more. Maintaining a fleet of similar vehicles has got to have major cost efficiencies.

    • 0 avatar
      danio3834

      In my experience, ride hailing apps often aren’t cheaper. Sometimes they might be, but that’s not really the main attraction. It’s the service and ease of use.

    • 0 avatar
      dukeisduke

      Not to mention while violating terms of their auto insurance policies. I’ve been rear-ended twice in 13 months, and both times, the insurance companies (theirs) asked whether their policyholders were carrying fare-paying passengers (in both cases they were driving alone).

    • 0 avatar
      PandaBear

      Medallion, that’s the main cost saving. Everything else is just BS.

  • avatar
    civicjohn

    Surprise, surprise. UBER is probably peeing in their pants because of this, supposedly they are looking for a $100 billion valuation, watch how quickly that evaporates. I’m sure they will take their time to pull the IPO trigger, as Wall Street has a short memory and the investment bankers need to make their fees.

    IIRC, UBER now delivers food (I use that), but the McDonalds franchisees are balking over the 20% haircut they have to eat, they have UBER on-demand workers, scooters, bikes, self-driving, you name it, UBER is ready to supply it.

    UBER may very well come out as a $100 billion IPO, but my guess is that it will be $80 billion or less within 2-3 weeks. I wouldn’t touch either of them, perhaps I’m too old, but the IPO pipeline is stocked with many multiple Unicorns (Pinterest? you have to be kidding).

  • avatar
    APaGttH

    If the business model is to move to autonomous vehicles and eliminate all the cost and management of human drivers, both Lyft and Uber are doomed. The technology just won’t be there before they run out of cash.

    The current level of technology is rendered useless in snow, salt covered roads, fog, and apparently low to the horizon bright sunshine. You know, scenarios where human drivers have challenges also.

    Full disclosure – got in on the LYFT IPO, sold my shares already

    • 0 avatar
      civicjohn

      @APaGttH, good to know that you bailed out, hope you got a decent piece of change for your willingness to throw down your cash!

    • 0 avatar
      PandaBear

      They would likely selectively give routes to self driving and leave the crumbs to the human drivers. If surge pricing works in traffic, they’ll work in snow, fog, etc too.

  • avatar
    stingray65

    Self-driving Lyft and Uber may be even more unprofitable, because someone will still need to own and maintain the vehicles. If Lyft or Uber owns the car then they are just like Hertz or a Taxi, and just think what the interiors will look like if no human owner is in the car to keep riders from trashing the vehicle. I see major maintenance and insurance costs ahead.

    I wonder if GM sold their shares before the price plunge?

    • 0 avatar
      SPPPP

      This is a very good point. If there are about 2 million Uber drivers in the US, and if one robot car could replace two drivers, that would mean Uber would need to buy 1 million robot cars. Assume $40,000 cost for each, and that means a $40 billion capital investment is required. Besides this, where would Uber even store the cars? Uber drivers currently provide that service for free.

    • 0 avatar
      PandaBear

      The key to a good exit is to sell or IPO when your business model cost less than the traditional market it is “disrupting”, but your revenue is not yet reduced because everyone else is also disrupting, and therefore at a race to the bottom cutting cost and subsidizing sales.

      They waited too long to IPO. The market can probably tolerate a 5-10B unicorn going IPO, but a 60B Uber would be hard to swallow.

  • avatar
    JMII

    If you look into Uber and Lyft you’ll see their business model is flawed. Seems Wall Street has figured this out.

    What makes a good ride? Service. How do you improve the service? Add more drivers. What happens when you have more drivers then riders? Supply and demand becomes inverted. Oh no! So how do you increase demand? Well you have to cut the cost of the service to encourage more people to use it. This lowers drivers pay. Then drivers realize the gig sucks and they quit supplying the service. The whole thing implodes.

    As mentioned by others it currently only works because most of the drivers have failed at basic math and thus have no clue how much driving people around town is costing them. These companies are currently subsidizing drivers to make up the difference, they can’t do this forever.

    Ride sharing only works if you (the driver) and your fare are going to the same place. Then you get paid for a trip you were already taking. At that point the best you could hope for is breaking even. The idea that this business will be profitable is nonsense. Clearly the automated “robot car” business model is YEARS away from working. The overhead will be massive as self driving cars aren’t cheap in terms of capital due to all the tech needed.

    Some further reading…

    http://nymag.com/intelligencer/2018/12/will-uber-survive-the-next-decade.html

    https://www.ridester.com/2018-survey/

    • 0 avatar

      “Ride sharing only works if you (the driver) and your fare are going to the same place”

      IIRC that was the idea behind ride sharing and that is why it is called “ride sharing” in first place – you share you ride to the same destination with other humans. It was not supposed to be full time job. Did something change in the process, is it now full time job and if it is why it is still called “ride sharing”?

      • 0 avatar
        JMII

        Exactly my point. They turned a favor (hey can I ride along with you to the mall) into a thankless, low paying job.

        Ride share would work better as a pure app that just connects people for a flat rate. The business model should be flipped – instead of passengers requesting rides drivers should be offering routes. For example: I drive to Generic Office Park daily, leaving at 7AM from Local High School… for $5 I’ll let you sit in my car if you don’t complain about the music I play. There is a reason buses, trains and planes have schedules, it makes the economies of scale work.

  • avatar
    SPPPP

    “Lyft’s IPO hasn’t panned out as expected.”

    As who expected? It’s going about as I expected.

    To quote Robert Frazier in Forbes, “We should not see companies like Lyft, with large losses and high valuations, as investments. They are exit events for early investors. The owners and early employees have wrung all of the value growth and user growth that they could out of the private capital market, so now it is time to tap the public market.”
    https://www.forbes.com/sites/kenkam/2019/03/28/pass-on-lyft-until-insiders-can-sell-their-shares/#4872f4532aba

    The fact that there was enough selling action in the stock to allow the share price to fall below the IPO price so soon suggests that a lot of subscribers were just flippers, who are uninterested in owning Lyft long-term.

    Interestingly, I wonder if Lyft’s “bad” IPO actually gives them a competitive advantage against Uber by knocking the legs out from under Uber’s pre-IPO valuation and crippling Uber’s ability to raise capital?

  • avatar
    PandaBear

    Same with Snap, this is the reason why those mega unicorns were not going IPO sooner. The ratchet they put into the funding rounds will make any IPO discount an underwater dive for the employees, and basically vacate the entire workforce.

    22B for Lyft, and the market can tolerate this for now like it did for Snap 2 years ago. Imagine they all go IPO now, and 60B for Uber, that’ll trigger a collapse of the entire tech startup sector.

  • avatar
    stuki

    The Fed just needs to transfer some mroe loot for it’s constituency, in order to keep Hype and Theft alive.

  • avatar
    civicjohn

    Waymo CEO showing off their self-driving technology on “Countdown To The Closing Bell” with Liz Clayman tomorrow at 3 pm ET. Of course, it will be on their closed loop in Phoenix, so I’m not expecting anything really dramatic – perhaps they stage a kid kicking their ball across the road or something like that.

    She’s done a number of interviews with Dr. Musk, wonder why with the announcement of the hardware 3.0 with their new in-house chip that they aren’t ready to go and tout it to the public.

    Also awaiting Tesla Q1 2019 sales, the estimates are all over the place.

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