Lyft – Self-flagellation

Lyft’s IPO is a rod for its own back

• Lyft’s IPO document reveals a company that I think will give its founders joy and validation when they ring the Nasdaq bell, but agony when they have to start making quarterly reports.
• This is particularly the case as Lyft is clearly not ready to IPO and there is plenty of money available in the private markets when it inevitably needs to raise money again.
• Instead, Lyft thinks that it needs to win a suicidal race with Uber to go public when I continue to believe that it would be best served by staying private.
• There are three reasons for this view:
  • First, public markets: The public markets are not for the faint of heart and certainly not for companies that are not properly established in their markets.
  • This is because shortcomings are brutally and publicly punished which can have a substantial impact on the company’s ability to do business going forward.
  • Companies with high earnings multiples (Lyft’s midpoint indicates around 10x 2018 EV/Sales) have very little margin for error and a bad earnings report followed by a substantial decline in the share price can lead to a loss of public confidence in the company.
  • This can lead to consumers deserting the product or service and/or suppliers demanding money upfront or harsher delivery terms.
  • This is why earlier stage companies, which are by their nature less predictable and more volatile, are better off managing their development behind closed doors rather than in the harsh glare of the public market spotlight.
  • Second, early stage: Uber and Lyft are still at a relatively early stage and are currently slugging it out for the US market and are losing a lot of money in the process.
  • This brutal competition involves subsidising both rides and drivers in order to bring as much volume as possible onto the platform.
  • In these network businesses, dominance is key and so this fight is likely to continue until one of them cracks.
  • Given that both have very deep-pocketed backers, this could take some time and against this backdrop, being public could cause huge problems.
  • Third, Advantage Lyft: Uber has no choice but to go public which I think would have offered Lyft a substantial advantage in its fight with Uber.
  • This is because Uber has committed to SoftBank, one of its biggest investors, that it will do so.
  • This would have allowed Lyft to operate in a freer environment once Uber had gone public as it would not have been shackled to quarterly reporting and the agony of trying to match expectations and make money every quarter.
  • I think that this represents another gift from Uber to Lyft very like the one granted in 2017 through Uber’s series of management failures.
  • I suspect that Google would have continued to finance the company for as long as necessary obviating the need for an IPO.
  • This is because Lyft now represents Waymo’s best route to market which is badly needed because Google does not make cars and the vehicle makers are increasingly reluctant to give Google access to their vehicles.
  • Fourth: fiscal imprudence: Lyft’s S-1 shows that it is spending a massive 21% of revenue on general administrative expenses (5% is normal) which is more than it is on R&D (14% sales).
  • Lyft is also investing in its own autonomous driving system which is clearly a complete waste of money as its biggest backer (Google) will be looking to Lyft to use its best-in-class solution.
  • Consequently, I am concerned that the management of Lyft’s financial decision making is not best in class.
  • This is another area that could cause a post-IPO share price meltdown.

Take Home Message

• I see no rational reason for Lyft to go public other than impatient investors.
• Consequently, if it is going public for this reason, I believe that its investors will regret forcing it down this path given that they are likely to be locked in for at least 12 months.
• Lyft should look at the example of Razer, Xiaomi, Meituan, Spotify, Sonos among others for all the reasons why it should stay private until it’s future viz a vis Uber and the US market is decided.
• I still think that Lyft’s owners should gracefully and quietly accept the gift being offered by Uber before it is too late.