By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Can Silicon Valley investors create $125-150 billion in ridesharing market value out of thin air?

This series, since the first Naked Capitalism post in 2016, has focused on Uber as the dominant and strategically pioneering ridesharing company, and as the only source of public data that could support independent analysis of ridesharing economics.

Last Friday, March 1st, Lyft issued its Form S-1, also known as a prospectus[1], significantly expanding our base of objective data about ridesharing. This post will analyze Lyft’s key claims. Reports indicate that Lyft is pursuing an IPO value of $20-25 billion, while Uber may be pursuing as much as $125 billion from its upcoming IPO.

Uber claimed that the “ridesharing” industry it had pioneered had substantially superior economics based on major technological innovations that explained its disruption of the traditional taxi/urban car service industry. This series presented evidence showing that those claims were nonsense and that ridesharing companies were actually less efficient than the traditional companies they were driving out of business.

It is important to understand Uber and the other privately-owned ridesharing companies since their impacts extend far beyond urban transport. One of the central themes of this series is that they have (and will continue to) significantly reduce overall economic welfare, and represent a major attack on the idea that the actions of consumers and investors in competitive markets can allocate capital to more productive uses.

The critical characteristic of ridesharing companies (such as US based Uber and Lyft, or Asian based Didi, Grab or Ola) has nothing to do with smartphone apps or competitive advantage or operational efficiency. It is the fact that they are backed by billions in cash from venture capitalists who have been willing to subsidize years of massive losses. Instead of consumers choosing the most efficient car service, those subsidies led them to choose the company that didn’t charge them for the actual cost of the service, and provided far more capacity than could be economically justified. Instead of funding the companies with the strongest sustainable competitive advantage, those subsidies led investors to fund the companies with the artificially inflated growth rates that suggested a path to quasi-monopoly market dominance.

Under private ownership, the claims that the ridesharing companies had created unprecedented levels of economic value ($70 billion for Uber, $15 billion for Lyft) had never been subject to any broad-based analyst or investor scrutiny. This series has argued that the unprecedented accomplishment of ridesharing is that its entire valuation was manufactured out of thin air. The valuation of other large Silicon Valley based companies (Amazon, Facebook) may be seriously inflated, but they had clearly established legitimate economic foundations, including powerful product and operational innovations, profits and strong cash flow.

This series has documented that Uber has no economic foundation, aside from its predatory use of billions in subsidies. None of its claimed technological innovations allowed it to produce car service at lower cost than incumbents, or create sustainable advantages over future competitors. It would still require billions in new efficiencies to reach operational breakeven, and billions more to economically justify the funding its investors provided. [2]

Lyft’s IPO kicks off the endgame of the “ridesharing” corporate value creation process

As discussed in Part Seventeen of this series [3], both Uber and Lyft filed preliminary, confidential prospectus data with the Securities and Exchange Commission in December, kicking off a race as to who would go public first. Travis Kalanick did not feel Uber was ready to face full capital market scrutiny, triggering a rebellion of Board members who impatient for actual returns on their investment. Kalanick was replaced by Dara Khosrowshahi in late 2017, who committed to take Uber public in the fourth quarter of 2019. Lyft wanted to go public first, to avoid the expected glut of IPOs this year (including Pinterest, Slack, Postmates and Airbnb) and to minimize direct comparisons with Uber. When word leaked that Lyft was targeting a first quarter IPO, Uber accelerated its filing plans but Lyft won the race.

The public release of Lyft’s S-1 filing will be followed (apparently starting the week of March 18th) with a series of investor roadshows. Based on investor feedback, Lyft and its lead investment bankers (JP Morgan, Credit Suisse and Jefferies) will set final prices and terms, and the date for the actual IPO.

Last Friday was the first time investors ever had the chance to review actual Lyft financial results. In the next few weeks they will have to decide whether they want to risk real money on the chance that Lyft’s value will continue to appreciate above the IPO price. If investors line up to buy Lyft stock at the company’s hoped-for $20-25 billion valuation, then the efforts to create ridesharing value out of thin air have succeeded, and it will make it much easier to Uber to achieve a strong valuation. Significant investor resistance to Lyft’s valuation objectives could cause serious problems for both companies, and could possibly burst the widespread public perceptions about ridesharing.

Four key questions potential Lyft IPO investors will want the S-1 to answer

Does the prospectus provide data showing that Lyft have a clear path to convert its current losses into ongoing, growing profits? Is there data showing exactly which factors (e.g. the ability to raise prices, the ability to capture market share, the ability to increase operational efficiency due to scale economics or new innovations) are likely to drive years of profit improvement? Is there data showing that aggregate demand for ridesharing is likely to grow strongly for many years? What might drive future demand growth (expansion into untapped markets, the ability to continually lower prices, capturing demand currently using other transport modes)? If Lyft could achieve sustainable profitability in its core ridesharing market, is there evidence showing how it could leverage its existing infrastructure and rapidly build profitable positions in other markets? As Uber will always be larger, is there evidence showing that both a primary and secondary competitor can profitably coexist without ongoing destructive market share battles?

Lyft’s prospectus doesn’t answer any of these questions

Lyft’s prospectus provides absolute no data demonstrating that it has the ability to profitably raise prices over time, increase operational efficiency or win significantly greater market share. It cites “growing the rider base” as the first plank of its future growth strategy, but provides no data showing what it thinks its current share of the market is, no estimates of future aggregate market growth, no evidence of what might drive that growth, and no explanation of what its future growth potential might be. Lyft makes no attempt to lay out a possible path to future profitability, or even a timeline as to when breakeven might be achieved.

The prospectus narrative includes a large number of claims that are completely unsubstantiated. Lyft says it has “continually improved rideshare marketplace efficiency” but provides no evidence of how its innovations or other claimed improvements actually reduced costs. It claims that “we expect our Contribution Margin to increase over the long-term as we scale and increase the usage of our platform” but provides no evidence showing how increased platform usage can drive significant margin improvements.

It highlights actions taken to “increase driver utilization when on the platform” without providing any data about actual driver utilization. It points out that “maintaining an ample number of drivers to meet rider demand” is one of the most critical drivers of performance, but provides no data on mix of drivers needed to meet that demand, and no data on driver turnover. It acknowledges “our need to provide larger incentives to drivers to help keep up with rider demand” but fails to explain how it can meet expected demand growth (or capture share from Uber) without directly reducing profitability.

The prospectus mentions several new markets Lyft is pursuing (scooter rentals, autonomous vehicles) but says absolutely nothing about the economics of those businesses, their near-term capital requirements or how they might contribute to future profitability. It acknowledges that the scooter business is currently an immaterial part of the business, but makes no attempt to explain where returns from its recent scooter company acquisition might come from, or when scooters might become a material part of the business. It mentions investments in a new “autonomous vehicle engineering center” and several AV-related joint ventures, but doesn’t say how big those investments were, or how they might eventually contribute to profitability.

The prospectus claims that “within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform.” But it provides absolutely no explanation as to why investors should believe that Lyft will be able to more profitably operate much more expensive and risky new technology than the other companies pursuing this (still hypothetical) opportunity. It doesn’t even bother to explain why investors should believe Lyft’s claim that widespread commercial use of AVs will be possible in this timeframe, given that just two years ago Lyft was predicting this would be achieved just two years from now. [4]

Lyft’s IPO is structured so that its current senior executives will get “B” class shares that have 20 times more votes than the “A” class shares the public can buy. Thus anyone buying “A” shares must have complete faith that the current owners can lead the company to sustainable profits and steady equity appreciation. The prospectus provides no explanation as to why investors should have this level of faith in current CEO Logan Green (age 34) or President John Zimmer (age 34), who will control the majority of voting shares.

Lyft’s prospectus describes a company with negative cash flow, growing annual losses that have reached nearly a billion dollars, and declining rates of revenue growth

Lyft lost nearly a billion dollars in 2018, 32% more than it did in 2017, and the prospectus acknowledges that “[s]ince our inception, we have generated negative cash flows from operations.” The three years of results presented in the prospectus show that Lyft significantly benefited from Uber’s 2017 annus horribilis,when it faced ongoing negative publicity about its Board turmoil and problematic corporate behavior. [5] This allowed Lyft to achieve a one-time growth spurt without having to spend as much on passenger discounts, driver incentives and advertising.

2016 2017 y-o-y 2018 y-o-y Total Lyft revenue (000) $343,298 $1,059,881 209% $2,156,616 103% Total Lyft expense (000) $1,035,901 $1,768,153 71% $3,134,327 77% % expenses covered by revenue 33% 60% 69% Lyft net income (000) ($682,794) ($688,301) 1% ($911,335) 32% Lyft net margin (199%) (65%) (42%)

2018 revenue growth was only half of 2017’s rate, while expenses grew slightly faster. Uber’’s travails allowed Lyft to cover 60% of its expenses with revenue in 2017 (versus only 33% in 2016) and cut its GAAP net margin to negative 65%. Further (but much smaller) improvements were achieved in 2018, with expense coverage improving to 69% and net margin improving to negative 42%.

Lyft’s prospectus shows that its largest source (over $1 billion) of recent margin improvement– cutting driver take home pay to minimum wage levels—is unsustainable

Lyft’s reported results would actually be substantially worse if it had not imposed unilateral cuts to driver compensation. These were achieved by charging drivers more for using Lyft’s software. [6] In 2016 Lyft kept 18% of gross passenger fares (excluding tolls, tips and discounts). The other 82% were gross driver receipts before their vehicle, insurance, maintenance and fuel expenses. Lyft increased its share of gross fares to 23% in 2017 and to 27% in 2018. This represents a $925 million transfer from drivers to Lyft’s shareholders. Had the 2016 driver/Lyft percentage split remained in place, Lyft’s 2018 net loss would have been $1.6 billion, and its net margin would have been negative 65% instead of negative 42%.

The Lyft prospectus provides the first public data on the actual volume of ridesharing trips; Uber has never published any volume data that would allow one to calculate average prices or unit costs. Lyft passengers paid $11.73 per trip (excluding tolls, tips and discounts) in 2016 and paid slightly higher (4-6%) prices in 2017/18. But 2018 gross fare payments were 323% higher than they had been in 2016.and total Lyft revenues increased 528%. But what drivers got per ride had actually declined from $9.61 to $9.52. The entire value of the (very small) passenger fare increase and the (very large) total volume increase went to Lyft, while individual drivers gained nothing.

2016 2017 2018 18 vs 16 Total rides (000) 162,400 375,600 619,400 281% Gross Pax fares paid (x-$000) $1,904,700 $4,586,700 $8,054,400 323% Total Lyft revenue (x-$000) $343,298 $1,059,881 $2,156,616 528% Lyft share 18% 23% 27% 49% Driver share 82% 77% 73% (11%) Gross pax fare per trip $11.73 $12.21 $13.00 11% Lyft revenue per ride (x) $2.11 $2.82 $3.48 65% Lyft expense per ride $6.38 $4.71 $5.06 (21%) Driver gross revenue per ride(x) $9.61 $9.39 $9.52 (1%) Lyft Rev @ 2016 18%/82% split $343,298 $825,606 $1,449,792 322% Lyft Net Income @ 2016 split ($682,794) ($922,576) ($1,618,159) Lyft gain from driver pay cuts 0 $234,275 $706,824 x-excluding driver/rider incentive impacts

The $925 million impact shown in the table actually understates the magnitude of the labor to capital wealth transfer because Lyft’s data misrepresents what passengers actually paid and what drivers actually received. Passenger discounts and driver incentives should be included in any calculation of prices or compensation, but are included in “Sales and Marketing Expenses” ($434 million in 2016, $804 million in 2018) along with advertising costs. Sales and Marketing expense per passenger trip fell from $2.67 to $1.30 and was the only expense category where Lyft achieved major unit cost reductions. Much of this was likely due to driver incentives cutbacks, producing even larger reductions in driver revenue per trip than shown in the table. The prospectus describes these unilateral pay cuts as management actions to “improv[e] the efficiency and effectiveness of certain driver incentives.”

While driver welfare may not be a major concern for some of the investors evaluating Lyft’s IPO, they should be able to recognize that there will be very little potential to use even deeper driver pay cuts to improve unit economics going forward. Lyft’s recent emphasis on ensuring the driver/vehicle capacity needed to capture additional share from Uber suggests that Lyft’s unit economics will likely worsen, and its margin gains cannot be extrapolated into the future.

Lyft’s data demonstrates that its business model has the same structural flaws as Uber’s

The table below combines the last five years of (unaudited) Uber data presented earlier in this series with the newly available three years of Lyft data. The same patterns appear in both sets of data, although the timing varies due to Uber’s faster early development and its 2017 travails.

Margin improvement at both companies was primarily driven by unilateral driver pay cuts. Uber achieved $3 billion in P&L gains after cutting its driver share of passenger fares from 83% to 68% between 2014 and 2016, similar to Lyft’s 2016-2018 cuts. [7] Uber was forced to partially rescind these cuts as it fought to stem driver and traffic losses in 2017. Uber’s problems allowed Lyft to increase its share of the two company’s revenue from 5% to 12% in 2017, which made it easier for them to cut back on driver incentives. [8] The comparison further confirms that further margin gains from driver pay cuts are likely unachievable, and that any market share battles will likely require both higher driver pay and increased rider incentives.

None of this data suggests that either company has any of the powerful scale economies needed to rapidly “grow into profitability.” Obviously, the ability to unilaterally cut driver pay is not a “scale economy” and if legitimate scale economies existed, evidence of strong margin improvements would have appeared by now.

($ millions) 2014 2015 2016 2017 2018 Uber gross pax fares $2,957 $8,900 $20,000 $36,180 $49,560 –% change year over year 201% 125% 81% 37% Uber % pax fares retained by drivers 83% 77% 68% 79% 77% Uber total revenue $495 $2,010 $6,450 $7,778 $11,359 –% change year over year 306% 221% 21% 46% % Uber expenses covered by revenue 42% 43% 62% 64% 82% Uber GAAP net margin (136%) (132%) (62%) (57%) (35%) Lyft gross pax fares $1,905 $4,587 $8,054 –% change year over year 141% 76% Lyft % pax fares retained by drivers 82% 77% 73% Lyft total revenue $343 $1,060 $2,157 –% change year over year 209% 103% % Lyft expenses covered by revenue 33% 60% 69% Lyft GAAP net margin (199%) (65%) (42%) Lyft % combined gross fares 9% 11% 14% Lyft % combined revenue 5% 12% 16% Lyft % combined net losses 15% 13% 19%

The rate of revenue growth has steadily declined at both companies, further underscoring that investors should not extrapolate recent margin gains many years into the future. Given its earlier growth, Uber’s deacceleration appears to have started a bit sooner. Past growth rates cannot be used as the basis for future forecasts because they are not based on either the ability to provide this capacity profitably, or the powerful scale economies that would drive profitability by rapidly reducing unit costs. Ridesharing growth is simply a function of investor willingness to fund losses in pursuit of market share or the growth rates that naive investors might misperceive as an indicator of future value.

Lyft’s business model also has a major weakness Uber does not face

As discussed previously in this series, there is no evidence that Uber’s investors ever believed they could achieve sustainable profits from efficient ridesharing operations in competitive markets. Uber was always pursuing the quasi-monopoly industry dominance that would (hypothetically) allow them to exploit platform-driven artificial market power.

All of the other large ridesharing companies in other markets (Didi, Grab, etc.) have been similarly focused on using predatory subsidies to pursue market dominance. Many of Softbank’s ridesharing investments were designed to accelerate the process of consolidating around dominate national/regional companies.

While these strategies were based on serious misconceptions about network economies, and none of these companies have shown any signs of sustainable operational profitability, they at least had some plausible logic behind them. Almost all of the smaller companies that attempted to compete with them (including Uber in China, Russia and Southeast Asia) have given up and sold out.

Lyft is the only large scale ridesharing company that claims it is worth tens of billions of dollars but does not have, and will never have a dominant market position, and has never attempted to explain how a secondary position could become viable. Even if one ignores more fundamental economic problems (such as the inability to produce car service at a cost consumers are willing to pay for) Lyft’s future viability depends on the ability of both Uber and Lyft to achieve sustainable profitability. Ridesharing has none of the characteristics (profitability, market maturity) that allow other competitive industries to maintain a stable pricing/competitive environment.

The dueling Lyft-Uber IPO process has demonstrated the instability of the current market. Lyft has aggressively worked to maximize the market share numbers it can present to investors, but this has already triggered worries about a fare war [9] and concerns that Lyft’s prospectus has materially overstated its actual market share. [10]

On what basis does Lyft argue that investors should value it at $20-25 billion?

Lyft’s prospectus makes no attempt to provide investors with data-based explanations of how it could achieve sustainable profitability or strong ongoing equity appreciation. One presumes that the stated $20-25 billion valuation targets simply reflect the financial ambitions of Lyft’s owners and investment bankers. Even if one uses the crude metrics such as multiples of revenue often used for valuation guestimates, these targets implausibly imply future appreciation potential stronger than Facebook’s. [11]

Undoubtedly some investors may buy the stock based on purely speculative logic, hoping for short term appreciation based on pent-up demand for new IPO issues, or mass market misperceptions about ridesharing. But the economics of ridesharing are not that complicated, and any investor willing to do a bit of research will fail to find evidence of sustainable profitability, much less the evidence that could justify these extremely rich valuations.

Lyft’s central prospectus claim is that investors should anticipate huge future growth because “Transportation is a Massive Market Opportunity” (“twice as large as healthcare”), because Lyft’s real business is “transportation as a service (TaaS)” and “we are one of only two companies that have established a TaaS network at scale across the United States. This scale positions us to be a leader in the transportation revolution.”

This claim is complete garbage. Lyft’s only business is its highly unprofitable urban car service, unless one wants to give them credit for their (currently immaterial) scooter rentals. The prospectus makes no effort to explain what a fully developed TaaS business might look like, or the investment future shareholders would be required to fund in order to create it. Lyft began publicizing its “vision” about a “transportation revolution” several years ago, [12] but fails to explain why none of its revolutionary predictions (“By 2025, private car ownership will all-but end in major U.S. cities”) have any chance of becoming true.

No other urban car service operator has ever profitably expanded into a wider range of transport services. Uber’s investors used to make similar claims that their true potential should be based on the entire urban transport market, including cars and mass transit. [13] Even though Uber continues to (unprofitably) invest far more in auxiliary businesses such as scooters and food delivery than Lyft does, it stopped making broader claims about its ability to grow across the transportation world years ago.

As with Uber’s past claims, Lyft’s TaaS “vision” rests on the false supposition that ridesharing will not only achieve sustainable profitability, but will continue to drive its costs down so dramatically that ridesharing becomes more economical than transit and car ownership. Instead of laying out delusional fantasies about the long-term future, Lyft might more usefully explain how it might someday drive its costs down to the level that the typical Yellow Cab company achieved years ago.

Lyft’s IPO prospectus appears targeted at investors who are willfully ignorant of industry economics but are willing to risk their capital on the basis of emotive narratives.[14] People willing to respond to long term industry “visions” but unwilling to think about the (false) claims about cost competitiveness they are based on, or recognize that the predictions based on that vision were all wrong. People willing to respond to claims about “core values focus on authenticity, empathy and support for others” but unwilling to recognize that the IPO that could make its founders billionaires depends on having unilaterally cut driver take-home pay down to minimum wage levels.

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[1] Lyft’s S-1 can be downloaded from the SEC’s Edgar website at https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm#toc633517_12

[2] All of the central arguments about Uber/ridesharing economics are documented in my Transportation Law Journal article Will the Growth of Uber Increase Economic Welfare? 44 Transp. L.J., 33-105 (2017) which is available for download at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933177

[3] Can Uber Ever Deliver? Part Seventeen (February 16, 2019)

[4] Andrew J. Hawkins, Lyft’s president says ‘majority’ of rides will be in self-driving cars by 2021, The Verge, 18 September 2016

[5] The Uber board turmoil and the events that triggered 2017’s negative publicity were discussed in Part Ten (June 15, 2017)

[6] While Lyft’s prospectus maintains the legal fiction that its revenue comes from the voluntary payments from independent driver/entrepreneurs who have chosen to purchase Lyft’s software, Lyft’s drivers are obligated to use this software, and to accept whatever “software charges” (commission rates) and trip fares Lyft choses to impose. Under the Uber/Lyft business model, drivers who wish to drive on anything more than a casual basis must incur significant vehicle costs and financing obligations, and Uber and Lyft use this artificial power to lock-in drivers who might want to quit when they realize how low their actual take-hoe pay is or when that pay is unilaterally cut. Nothing in the prospectus suggests that these increased “software charges” had been justified by anything Lyft did to make its software product more valuable to drivers.

[7] See in particular Part Eleven (December 12, 2017) and Part Sixteen (August 13, 2018). The key study documenting take-home pay below minimum wage levels was Lawrence Mishel, Uber and the labor market: Uber drivers’ compensation, wages, and the scale of Uber and the gig economy, Economic Policy Institute, 15 May 2018;

[8] The data strongly suggests that Lyft might not have survived without Uber’s 2017 public ugliness. Lyft was holding discussions with potential acquirers before realizing its windfall revenue growth. Jordan Golson, Lyft reportedly declined GM’s $6 billion acquisition offer, The Verge, 29 August 2016.

[9]Amir Efrati, Lyft Kicks Off Price War With Uber Ahead of IPOs, The Information, 25 February 2019; Kate Clark, Here’s why you’re getting all those sweet Uber and Lyft discounts, Techcrunch, 26 February 2019

[10] An independent firm measured Lyft’s US share as 29%, versus the 39% claimed in the prospectus. Alison Griswold, How Lyft stacks up against Uber, Quartz, 1 March 2019

[11] Eric Newcomer & Olivia Zaleski, Lyft Touts Growth to IPO Investors as Losses Near $1 Billion, Bloomberg, 1 March 2019. At $25 billion, Lyft would match Snap, which had the highest ever revenue-multiple based valuation at the time of its IPO. Potential Lyft investors might consider that Snap’s equity value collapsed from over $24/share to under $6/share in the nine months following its IPO. Kurt Wagner & Rani Molla, Two years after going public, Snap’s problems are still all about growth, Recode, 1 March 2019

[12] John Zimmer, The Road Ahead, Medium, 18 September 2016

[13] Bill Gurley, How to Miss By a Mile: An Alternative Look at Uber’s Potential Market Size, Above The Crowd(July 11, 2014)

[14] Perversely, if Lyft’s IPO is successful, it will be largely due to artificially constructed narratives about the wonderful economics of ridesharing that were developed and promulgated by Uber, not by Lyft. See Part Nine (march 15, 2017)