Shares of Lyft (LYFT) opened trading this morning at $87.24, 21% above the $72 offer price set Thursday night. The offering represents a $2.3 billion-haul for Lyft and reflects plenty of optimism about its future.
Before you jump into the stock now, however, there's a few things to consider.
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For one thing, there's Uber, its much larger competitor, which will be going public sometime this year. Uber's arrival on the scene will dampen enthusiasm for Lyft, which at the moment has scarcity value as the only ride-sharing "play" in the market.
Second, the path to profitability, let alone prosperity, for this company is dubious at the moment.
As I pointed out a couple weeks ago, Lyft implies profit in its "contribution margin," which is a kind of dressed-up gross profit. That number was $921 million last year and compared to a GAAP number, contribution is a hypothetical, as if the company had virtually no expenses other than the cost of each ride on a kind of normal basis.
In reality, the company lost $911 million in 2018, having spent $3.3 billion to generate revenue of $2.2 billion. Besides normal operating costs for the company, it has spent intensely to "incentivize" drivers and riders to capture share.
There are a couple of places this can go from here. One is that the ride-sharing market, which is currently valued at $54 billion according to data compiled by D.A. Davidson's Tom White, who initiated coverage March 19 with a Buy rating and a $75 price target, could rise to $104 billion over a decade. Lyft could get an increasing share of the bookings for that market -- its share today stands at just 15%, according to White. In that scenario, Lyft's spending could moderate, leaving more to fall to the bottom line as it and Uber settle into a comfortable duopoly in the market.
In that view, the company could be bringing in a contribution margin of 70% in a decade from now, up from 43% at present. That might give it an adjusted Ebitda margin of 20%, which would be nice.
But a lot of other things could happen, too. The ride-sharing market could cool, Lyft's expenses could remain high if the market remains fairly competitive and its profit could remain under pressure.
And a giant question beyond those scenarios is what happens as "autonomous" taxi services enter the market. Lyft's R&D budget is seen as being relatively small in comparison to Uber and others. Daniel Ives, who initiated coverage this week with a Neutral rating and and $80 price target, warns of "the next generation autonomous driving arms race with [Alphabet's] Waymo and others," who he sees as "well ahead of the company from an R&D perspective despite its Las Vegas fleet of autonomous vehicles."
Bottom line, Lyft has spent tons of money to generate revenue while losing a bundle. There's no profit at the rate of spend they've incurred. How they'll turn that is not clear. The smart thing would be for Lyft to become a true technology vendor, selling logistics services to fleets of ride-sharing services at a very high profit, rather than booking all the rides themselves. Whether that will ever happen is anyone's guess.
In the meantime, buckle your seat belts -- this first-day will probably see lots of euphoria for the company and its bankers, but the road ahead is less certain.
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