Lyft’s IPO: Buyer Beware

Buyer Beware:  Why Lyft’s Current Business Model is Unsustainable and the Stock is Probably a Losing Long-Term Investment

A few hours from now, the rideshare company Lyft will go public.  Shares of stock will be offered on the NASDAQ.  A few people are about to become insanely rich overnight.

Lyft began operating in 2012.  In the seven years since the high-tech startup has grown into the second-largest rideshare transport company.  Uber, which ranks first, enjoyed a four-year head start on their rival.

However, some analysts now believe Lyft’s long-term prospects are brighter given the number of cities where the company operates (300) and growth projections within those markets.  Certainly, Lyft will be an attractive investment for initial speculation in what’s been a booming American economy.  The timing of Lyft’s public launch couldn’t be better than now.

However, Lyft is beset with many questions and potential problems.  What are my credentials to make this statement?  Well, admittedly, I know nothing about the company’s ownership, its management team, its technology, or anything whatsoever to do with its finances.  What I do know is its current business model is badly flawed and hence, unsustainable.  Lyft can’t continue to operate as it’s now doing and expect to generate much of any profit for investors.  In other words, don’t expect dividends to be paid soon.  In fact, profits may never come.

We’ve seen this false hype before — high-tech stocks and even great ideas that seemed they couldn’t miss, go from boom to bust.  Does anyone remember the late 1990s?  Apparently not.

Lyft is expected to sell 32.5 million shares at around $72 each in the initial public offering phase (IPO), taking place on Friday, March 30, 2019.  The company will instantly be valued at $25 billion, a remarkable degree of investor confidence for such a young company that has yet to produce a profit in any of its seven years of operations, to date.

Read that again — yet to produce a profit.

Sure, Lyft (and Uber) have set the stage for what seems like a transformative enterprise that could change how millions of people get around in urban centers.  Most of us have used the service and do find it appealing.  The convenience of simply pulling out a smartphone on any city street, typing in an address, and getting a car direct to your doorstep within minutes is an attractive feature.  Moreover, ridesharing doesn’t require the handling of cash since all transactions are done by credit card (which is already on file when the consumer signs up for an online account).  Finally, ridesharing fares cost significantly less than taxis and other means of private transportation.  And therein lies the problem.

Lyft and Uber have been competing in a heated rivalry, especially over the last year or so, which has really been great for riders, but bad for both companies and especially their drivers, which are not employees but independent contractors.  The battle to inflate market share has kept fares ridiculously low in some cities, which has resulted in drivers’ pay being cut.  Lyft has been able to weather financial losses until now, and the infusion of IPO capital surely will give the company a huge boost.  However, there’s simply no way to generate profits in the long-term based on any of the current numbers.

Why not?  Let me explain.

Presently, Lyft is losing money.  To make a profit, the company must either:

1.  Raise prices
2.  Reduce labor costs
3.  Ramp up technology (which will reduce labor costs)

Sorry, riders — but paying $8.45 for a six-mile ride cannot continue.  That fare isn’t feeding all the mouths that need to be fed when it comes to operating a motor vehicle, maintenance, fuel, labor, customer service, management, marketing, insurance, and other associated costs.  Making up the current deficit and then generating a profit for shareholders will require the implementation of one or more of the options above.  There’s a reason the taxi costs $12 while the Lyft ride costs $9.  It’s because the trip is somewhere between $9 and $12 in cost, and Lyft is undercutting the competition.

If prices increase to a level that offsets costs and generates profit, ridesharing won’t be nearly as attractive to consumers.  Right now, many people are turning to ridesharing because it’s cheaper than a taxi.  That won’t be the case if fares go up by a substantial margin, which is probably inevitable given the costs of driving in urban markets.

If labor costs are cut, which means driver’s pay is slashed, rideshare companies won’t be able to attract new talent, nor keep those the drivers they have.  Uber and Lyft have been in a war to the bottom to see which company can pay its independent contractors less, presumably in an attempt to make their balance sheets look good.  With high turnover, rideshare companies are now bombarding social media channels desperately trying to attract new drivers, even offering so-called incentives to sign up.  Check your Facebook feed after visiting the Lyft page sometime and see what pops up.

Ridesharing is still a relatively new phenomenon and many drivers may be fooled into thinking it pays more than what’s actually accrued after time, investment, fuel costs, and wear and tear on personal vehicles — not to mention the inherent risks that go along with working odd hours driving on the streets (crime, traffic tickets, auto accidents, and so forth).  As the word spreads that many Lyft drivers make barely above minimum wage, it will be increasingly difficult to find the gullible.  Furthermore, the low rate of pay (which based on my personal experience varies between $8-14 per hour, and that’s — before taxes and zero benefits) will inevitably discourage better drivers and attract people of lesser quality.  Seriously, who can live in cities like New York, Washington, San Francisco, or Los Angeles on $11-an-hour?

Poverty-level wages, essential to profits, will attract marginal people — both in quality and character.  Increasingly, expect to see problems (like Uber sexual assaults, which have risen significantly).  There’s simply no way to attract a viable workforce paying $11 an hour with no benefits.  It’s a lettuce picking job behind the wheel.

Investors may be attracted to the company’s high-tech prospects, which could be on the horizon.  The most revolutionary component of ridesharing of the future is autonomous vehicles.  If Lyft (and Uber) can convert cars into a driverless experience, that eliminates significant labor costs.  Inner-city transportation would never be the same again.

But let’s not get ahead of ourselves, just yet.  While the technology does exist and the rideshare giants undoubtedly would chomp at the bit to convert to driverless cars if given an option, nevertheless, significant legal and practical objections do remain.  How many cities and states will allow hundreds or perhaps thousands of cars to be driverless and how long would this process take?  Additionally, what happens when a driverless car kills someone, as happened last year in Phoenix?  Accidents are part of the equation and are bound to occur (even if they aren’t caused by technical malfunctions).  Will city and state governments allow this controversial new technology on the streets?  Perhaps the biggest hurdle of all — what about consumer confidence and traditional habits?  Will riders get into a car that doesn’t have a living person as the driver?  Sure, high-tech might make driverless cars statistically safer and perhaps these concerns shall be overcome.  But I’m not convinced that either Lyft or Uber will be able to convert to a driverless vehicle fleet, not anytime soon.  Any investor would be a fool to think this is the game-changer that will suddenly make rideshare companies profitable.

Hence, rider fares must increase (jeopardizing profit), labor costs must be reduced (jeopardizing profit), or high-tech must become the lifesaver for Lyft and Uber (probably the only viable option).  Then, add the uncertainty of gas prices now at a historic low (when adjusted for inflation), rising automobile acquisition and repair costs, and other economic uncertainties, and it’s impossible to imagine a better climate for ridesharing companies that right now nor how things will improve.  If Lyft and Uber can’t make a profit in these extraordinary conditions, how will they make money when the inevitable slowdown or downturn occurs?

This isn’t to say Lyft and Uber are doomed to fail.  To the contrary.  Ridesharing is here to stay.  It’s great for consumers.  But it won’t be nearly the bargain later on when operating costs and shareholder expectations create pressure to raise fares.  A ride from the airport can’t be delivered at $12 when the actual cost is higher.  It’s unsustainable.

No doubt, Lyft is going public at the ideal time for its owners.  Uber will likely be following suit, soon.  Unfortunately, those who invest in all likelihood have never driven for the company, seen the day-to-day operations, nor done the math.  I have.

Those who buy shares in these companies early and then hold rideshare stocks could end up in a riderless investment, with no idea when to bail out.  Short-term, Lyft could be an attractive investment.  But as reality sets in, no one knows where the profits will come from.

My advice is, don’t get in.

TAG: Why Lyft is a bad long-term investment