LYFT

Valuation of Lyft: A Success Story or a Debt Pit?

Introduction

The ride hailing application Lyft, which was established in 2007, is being offered to the public on March 29 with a valuation of $ 23 billion. It is worth noticing that Lyft is not profitable with an EBITDA of $ - 943 million on revenues of $ 2.15 billion. Moreover, it has an EBITDA loss equal to 43.7% of its revenues. Despite this issue, Lyft received intense interest from investors. It is likely that Lyft will perform better than expected. Lyft is the first of several “unicorn”s (a startup with a value of 1 billion dollars and above) that are planned to go public this year. Considering that Uber will also be offered to the public in the upcoming months, Lyft's IPO will give an idea to the investors about how ride hailing companies are valued on the market. Within this context, Lyft's IPO prospectus, explains investors on which financial metrics the company wants to be evaluated in detail and shares what plans it has for the future.

On the IPO prospectus, Lyft emphasizes that it is a disruptive innovation that will redefine the transportation sector and it will operate in many sub-areas of transportation in the future. In line with this goal, Lyft made acquisitions in the short-term bicycle and scooter rental area. It also states that the company will make R&D investments for developing autonomous vehicle technology. Autonomous vehicles have great importance for the sustainability of the company in the distant future. Driver expenses make up a very large portion of Lyft's billing prices. Despite billing $ 8.054 billion to customers in 2018, Lyft's revenue was only $ 2.156 billion. We can say that ride hailing companies will strive to minimize this cost in the upcoming years. However, governments are expected to make new regulations on the ride hailing area. This, in turn, may increase the costs of the driver and disappoint ride hailing companies. Therefore, the future of autonomous vehicles has a great impact on the valuation of Lyft.

Lyft states that it will continue its operations in a limited area (America and Canada) and will not invest in areas of different business lines (e.g. food delivery, cargo, etc.). When evaluating Lyft, it is necessary to take into account that it aims to grow without losing its focus in a limited business area.

Valuation Analysis

Lyft shows that it has the capacity to increase its revenues quickly. Revenues increased by 209% between 2016-2017 and 103% between 2017-2018. Lyft, with revenue of $ 2.156 billion in 2018, is expected to increase its revenue at a decreasing rate in the coming years.

Another noticeable metric is the increase in Lyft’s share from the amounts billed to the customers. While Lyft can only convert 18% of the amounts billed to the customers into income in 2016, this rate increased to 26.8% in 2018. However, given the competitive environment of the ride hailing industry, it is not very likely for Lyft to maintain this level of profitability in the long term. We can estimate that the “Income / Amount Billed to Customers” ratio will be around 20% in the long term.



Lyft emphasizes that the increase in revenues is parallel with the increase in the number of active users. The number of active users increased by 431% over the period from the first quarter of 2016 to the last quarter of 2018. While the income per-user was $ 98.09 in the first quarter of 2016, it was $ 354.84 in 2018. In other words, active users have increased their frequency of Lyft usage. Over the same period, Lyft increased its market share from 22% in December 2016 to 39% in December 2018.




Although Lyft's potential to generate more income is high, it seems that Lyft is not successful in terms of profitability. While the ratio of EBITDA to revenue was 193.7% in 2016, this rate was 43.7% in 2018. Although the ratio of losses to revenues has decreased, the loss of $ 943.5 million in 2018 makes it difficult for the company to continue its operations. The decrease in cash and cash equivalents in the table below shows how unsustainable this situation is. We can say that the most important factor in Lyft's decision to go public is the need for financing.




Comparison

The fact that Lyft is the first company offered to the public in the ride hailing industry makes it difficult to compare Lyft with similar companies. The limited availability of investors to make comparisons causes the valuation to be based mostly on the story presented by Lyft. However, we think it would be useful to compare the data of similar companies operating in the ride hailing industry.




In the table above, a sample was created using the leading companies in the ride hailing industry. When evaluating Lyft, it is necessary to consider how it performs against competitors (especially Uber). At this point, Lyft and Uber differ strikingly at 2 points. As it can be seen, Lyft performs better than Uber in the portion of income left to company from the amount billed to customers. However, Lyft loses $ 11.50 per $ 100 billing, while Uber loses half that figure. It seems that Lyft is less likely than Uber to convert these chronically ongoing losses to profits. On the other hand, Lyft can convert a higher portion of its gross customer invoices into income. While Uber converts 22.6% of each invoice to income, Lyft converts 26.8%. For this reason, we can say that Lyft has more bargaining power against the drivers and this will positively affect the valuation of the company.




If we price Lyft according to Uber's market value ($ 120 billion, 10.62 times of its income), we get approximately $ 23 billion. Lyft emphasizes that a valuation of $ 20-25 billion is possible indeed. We can say that that these figures circulating in the market is very high, considering Lyft's equity of negative $ 2.8 billion. If we make a value estimate for Lyft with Uber's latest venture capital valuation, we reach to a price of approximately $ 14 billion. Lyft needs to implement practices that will increase its profitability in the coming years rapidly. Otherwise, it does not seem possible for Lyft to continue its activities. As a result; we can say that the factor behind valuations of these ride hailing companies, considering their continuous losses since their establishments, is the growth potential of their incomes

1 The most recent valuations are used for the “Venture Capital Valuation” column.

and the expected increase in their profitabilities. We can say that the story put out by Lyft will have an important place for investors while creating their income and profitability expectations.

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