Uber vs. Lyft – Blood in the water

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This is Lyft’s best chance to catch Uber. 

• With yet another skeleton emerging to hinder Uber, Lyft is increasing its recent fund raising by $500m as I think it has realised that now is its best chance to reel in Uber.
• Lyft has increased its recent $1bn round that was led by Google and CapitalG by another $500m bringing the total post-money valuation to $11.5bn.
• The extra money will be invested in passenger and driver products which I think basically means reducing the fares and increasing driver take-home in a bid to gain market share.
• 2017 has been a great year for Lyft but only because Uber has pretty much had the worst year imaginable.
• Constant turmoil, management turnover, bad press, unhappy drivers and a series of scandals has led to the company focusing on anything but its core business in 2017.
• This has taken another downward lurch with the disclosure that it suffered a data breach on 57m users and failed to make the users aware that their data had been compromised.
• This is exactly the kind of bad press that Lyft can capitalise on when it comes to tempting existing Uber users to consider trying Lyft.
• So far in 2017 this has been very successful as Uber’s lack of focus has led to Lyft being able to confidently expect to improve its market share to 33% from 20% at the beginning of the year.
• This leaves Uber on 66% which based on my rule of thumb for network based businesses, is still enough to eventually win the market, but its margin for error has been substantially reduced.
• This rule of thumb states that a company that relies on the network must have at least 60% market share or be at least double the size of its nearest rivals to begin really making profit (see here).
• Coming into 2017, Uber had a 20% cushion before Lyft could really start causing it some problems, but this cushion has now been reduced to just 6%.
• Furthermore, with Google is now backing Lyft as the best way for it to get its self-driving technology (Waymo) to market, this gives Lyft much deeper pockets than it had previously.
• This combined with how much it has closed the gap on Uber over the last 9 months, means that Lyft is now a real threat.
• If Lyft can take another 6% or more of market share from Uber, Uber will have lost its hallowed status and as a result I would expect its financial performance to deteriorate materially.
• All of this plays in Lyft’s favour as Uber’s reputation is now in such a bad state that it has to tread very delicately wherever it goes.
• This means that the aggressive expansionism that gave Uber its dominant share is no longer possible handing all the initiative to Lyft.
• I have been very negative on Lyft to date as its position looked hopeless but with Uber constantly shooting itself in the foot has given it a fighting chance.
• There is no way I can justify a $70bn for Uber given this outlook, and if Softbank is offering this to shareholders to build its stake, I think this represents a great opportunity to exit.