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Lyfting off to a narrow moat

Ali Mogharabi  |  26 Mar 2019Text size  Decrease  Increase  |  
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Lyft, the second-largest ride-sharing service provider in the US, is set for an initial public offering later this month. The company has gained share from leader Uber in an addressable market that we value at over $500 billion (based on gross revenue) by 2023, growing 24 per cent per year over the next five years.

In our view, Lyft warrants a narrow economic moat and a stable moat trend rating, thanks to the network effect around its ride-sharing platform and intangible assets associated with data on riders, rides, and mapping, which we think can drive the company to profitability and excess returns on invested capital.

Lyft has raised around $5 billion in capital, according to PitchBook. Its 11th and last round of funding in June 2018 was for $600 million, which implied a valuation of $15 billion. We believe the intrinsic value of Lyft is probably over $24 billion, as further growth remains in the ride-sharing market. We think Lyft’s top line can grow at a 36 per cent compound annual growth rate through 2028 to more than $21 billion, driven mainly by increased adoption of ride-sharing globally. We assume that the company will become profitable in 2022. On the basis of PitchBook data on recent venture capital-backed software companies, we expect the IPO price to represent Lyft as an $18 billion-$30 billion company.

From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation. It has tapped into the bike- and scooter-sharing markets, which we think are worth over $9 billion and growing 9 per cent annually through 2028. Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help it expand margins; without drivers, it could recognize a bigger chunk of the fare as net revenue. In contrast to Uber, Lyft is not focused on food transportation or logistics. We like Lyft’s relatively narrower focus on consumer transportation but note that Uber has an edge on Lyft in terms of an earlier start, higher market share, and a stronger network effect around its service.

Many risks remain around legal and regulatory matters In the rapidly growing ride-sharing space. Lyft’s regulatory issues today involve how the company runs its everyday business, from employee type recognition to a minimum pay requirement. Various other requirements such as background checks and driver classification are also being enforced. In our view, pressure from such legal matters will persist.

Possibly emerging from Uber's shadow

While its rider and driver matchmaking is not available globally, as is Uber’s, Lyft has displayed strong growth in the U.S. in terms of rides requested and provided, revenue generated, and variety of services offered. According to Lyft’s S-1 filing, it more than doubled its net revenue in 2018 to around $2.2 billion, and we think this will be followed by more than 60 per cent growth this year.

We believe that Lyft will remain one of the top players in ride-sharing mainly in the U.S. and Canada, with further growth opportunities in Latin America. Its ride-sharing revenue growth is will to outpace the overall market thanks to continuing expansion in more markets plus an increasing adoption rate as the company attracts more users. As ride-sharing also represents a substitute for public transportation, we think it can take revenue from public buses and trains over time.

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We also expect Lyft to increase its presence in bike-sharing and scooters. As Lyft continues to attract more riders and assign drivers to requests more quickly, we think overall vehicle capacity utilization will increase. Besides the driver take rate, which is netted out of Lyft’s net revenue, we believe a portion of Lyft’s cost of goods sold is fixed and revenue will grow at a faster pace than these costs (albeit variable costs associated with assets such as bikes and scooters), leading to gross margin expansion. We also project that Lyft will benefit from operating leverage in the years ahead.

In the US, Lyft’s main ride-share opponent is Uber. Based on data from Second Measure, as of January 2019, Uber’s market share was 68.5 per cent versus Lyft’s 28.9 per cent. Yet in its S-1, Lyft stated that it had 39 per cent market share in the US by the end of 2018, based on estimates from Rakuten Intelligence (we should note that Rakuten is a 13 per cent investor in Lyft). Our prior estimates would have pegged Lyft’s market share at 30 per cent-35 per cent before the filing.

Despite the fuzziness around market share data at this early stage in US ride-sharing, Uber still appears to have a leg up on Lyft when looking at ride-sharing as a whole, as Uber has said it has more than twice as many riders and has completed 10 times more rides than Lyft since inception. While Lyft has fewer riders on its platform and fewer rides taken because it is focusing mainly on the US market, it may be able to avoid some bumps on the road toward profitability, including the international regulatory-related ones that may require additional costs. However, given Uber’s already established leadership position in the US, Lyft may also need to more aggressively acquire riders via lower pricing or more spending on sales and marketing.

is an equity analyst at Morningstar, based in Chicago.

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