Avoid the Lyft IPO

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The first major IPO of 2019 has arrived. This year, new IPO records (for& nbsp;Cut& nbsp;and& nbsp;lack of profits), and everything starts with Lyft (LYFT). The carpool company is expected to trade in the coming weeks with a market capitalization of between $ 20 billion and $ 25 billion.

Midway through the proposed range, Lyft gets my rating unattractive. It shares many of the features that have driven investors away from others& nbsp;Recent IPOs: Increasing losses, low barriers to entry, poor corporate governance, and unrealistically high valuation. These factors make Lyft this week& nbsp;Dangerous zone& nbsp;to choose.

No network effect means no profit

Everyone knows that Lyft is growing very fast and losing a lot of money. Bulls will argue that even if profits are not yet achieved, Lyft's growth puts it on the path to profitability. Their theory is that as Lyft increases the number of riders and drivers on its platform, it creates a network effect that increases its value and gives the company a competitive edge over potential newcomers. A platform with more drivers is more valuable for runners and a platform with more riders is more valuable for drivers. Therefore, in theory, if first-timers reach a dominant share of runners and drivers, they create huge barriers to entry for newcomers to the market.

Facebook (FB) is a great example of the power of network effects. People may not like Facebook's privacy policies, but they join and stay on the social network because all their friends are there. What is the use of publishing images that no one can see? As a result, the larger the number of FB users, the more FB is valuable to its users. The more users there are on FB, the more he can advertise to them.

FB earns a lot of money in advertising and offers new features to attract and retain new users. This virtuous cycle continues as new entrants suffer losses in an attempt to reach the critical mbad of users needed to become profitable and, hopefully, competitive with FB. The power of Facebook's network allows it to continue to grow and maintain a dominant position over its competitors such as Twitter (TWTR) and Snap (SNAP).

Lyft does not take advantage of a Facebook-like network effect:

• Low switching costs: It is easy for drivers and pbadengers to use multiple carpool applications. Roughly& nbsp;70% of drivers& nbsp;work for both Uber and Lyft, and smaller services such as& nbsp;Juno& nbsp;have grafted this network. The only switching cost for users of these platforms is the time it takes to close one application and open another. Switching costs are also of no consequence for drivers, especially for new ridesharing applications that can use Lyft and Uber driver ratings as a less expensive way to filter drivers.
• No scale effect: most of the use of Lyft and Uber comes from a single city. Lyft states in its S-1 that 52% of its riders use Lyft to get to work. The localized nature of the carpool industry allows competitors to make progress by focusing on a single city. If a start-up can attract enough riders and drivers to a single city, it does not matter if Lyft has a superior network nationally.

These two factors will make it difficult for Lyft to create a network effect that gives it a sustainable competitive advantage or the ability to make money.

Increasing losses reflect no network effect

The magnitude of Lyft's losses is staggering, even considering the structural problems it faces. The Company's after-tax operating income (NOPAT) was $ 953 million in 2018, an increase of 38% from its $ 691 million loss in 2017. No IPO in the US recent history can not compensate for these losses. The closest,& nbsp;Break& nbsp;(SNAP), lost $ 498 million the year before its IPO, about half that of Lyft.

Figure 1: Lyft's turnover and NOPAT's evolution in the opposite direction

Figure 1 shows that Lyft increased its business figure by 104% in 2018, but has not made progress on the path to profitability.

Investors should be skeptical about Lyft's declared market share

At the beginning of his S-1, the& nbsp;page 2Lyft claims to hold a 39% market share in the US rental market, compared to 22% in 2016. Several media have treated this as a fact, but there are three reasons why investors should be extremely skeptical about Self-reported market share of Lyft number:

1. Conflicting sourceThe results come from Rakuten Intelligence, which is also a major investor in Lyft. Rakuten clearly has a financial interest in having Lyft look better before it goes public.
2. IncompleteThe 39% represent only Lyft and Uber. It ignores small businesses, such as Juno, which hold a sizeable share of the market in some cities.
3. A period chosen by cherries: Data cover only the month of December. With people traveling or going to parties in December, carpooling for this month is probably not representative of the rest of the year. In addition, the choice of a shorter measurement period allows Lyft to increase its self-reported figure by offering significant rebates and incentives in December.

A more reliable badysis of market shares comes from the data society& nbsp;Second measure, which places Lyft at 29% of the US market, compared to 69% for Uber and 3% for all others. Second Measure's data shows Lyft a market share slightly above 15% in 2016. Lyft is gaining market share as it claims, but at a slower pace than its own numbers suggest. In addition, Second Measure's data suggest that most of Lyft's gains occurred in 2017 during& nbsp;#deleteuber& nbsp;campaign. At the same time, the company's market share in 2018 increased by only 3 percentage points compared to the previous year.

Lyft wants investors to believe it is about to reach market share parity with Uber in the near future, but third-party data suggests it is still far behind.

Low barriers to entry

Even if we could trust Lyft's market share number, the question is, "So what?" If Lyft manages to capture a large part of the carpool market by operating at a loss, the only way for investors to winning is selling to bigger fools. . In the end, the company must be able to increase prices, reduce costs, reduce the share of the product it gives to drivers, or all three, in order to generate sustainable profits.

However, if Lyft or Uber try this strategy, newcomers will only be able to siphon runners and drivers more easily. In fact, Lyft and Uber have paved the way for fast competitors by establishing the carpool market. For example, Juno quickly set foot on New York, thanks in part to& nbsp;piggyback on driver selection by Uber and Lyftthat is, accept only those who receive an appropriate valuation, and thus reduce the costs of acquiring employees (driver).

In addition, start-up costs for companies targeting a single city, such as Juno or& nbsp;Bubbl, are already quite low. If Lyft and Uber increase their prices, new entrants will also benefit from higher incomes and lower start-up costs. As a result, we believe that Uber and Lyft can look forward to strong competition in all major cities when they can no longer afford to spend millions of dollars a year and that they can not afford to spend millions of dollars a year. they must operate autonomously.

Fundraising is not a sustainable competitive advantage

The only competitive advantage that Lyft can claim at present is its ability to raise capital. With& nbsp;$ 4.9 billion& nbsp;Capital raised before its IPO and whose balance sheet amounts to $ 2 billion, Lyft can afford to operate at a loss longer than its potential competitors. Lyft and Uber are likely to believe that their cash reserves and ability to raise future capital will scare smaller competitors and allow them to build a sustainable duopoly in the United States.

Even in duopoly, Lyft is very disadvantaged compared to Uber, which has raised more than& nbsp;$ 24 billion. In addition, Lyft and Uber also face competition from well-funded international companies such as Didi, as well as large companies that are likely to enter the carpool market, particularly companies such as Waymo (GOOGL) and General Motors (GM). ). develop autonomous driving technology.

Not even big hope for profits

Most of Lyft's fast-growing, high-loss businesses claim that they build their customers through high sales and marketing expenses, and that they can reach a certain scale to achieve profits. This answer is usually absurd, but it is particularly unrealistic for Lyft. Even if the company had reduced its selling and marketing costs to zero, it would still have lost $ 149 million last year.

Lyft's own accounting suggests that she does not expect to make a profit any time soon. For example, management badumes that it will not realize the benefits of its great& nbsp;deferred tax badets& nbsp;(perhaps the only advantage of large cash losses) when it discloses a full valuation allowance on these badets:& nbsp;page 93:

"We expect to maintain this provision for depreciation until it is more likely than unlikely that the benefit of our deferred federal and state deferred tax badets will be met." will be realized in the form of expected future taxable income in the United States. "

In terms of accounting, Lyft baderts that its deferred tax badets are worthless now, as the company does not expect to realize any profits in the near future.

Removing the drivers does not solve the profit problem

Lyft talks a lot about the importance of drivers, but they clearly provide for a future where they will be able to separate them from the equation. Lyft spent $ 250 million (9% of& nbsp;invested capital) in 2018 to acquire the bikeshare Motivate company, which uses the term "multi-modal platform" several times to describe itself in its ranking. Figure 2, taken directly from Lyft's S-1, shows how the company designs its platform beyond the pilots.

Figure 2: Lyft's Efforts to Eliminate Drivers

Lyft claims cycling, scooters and even public transportation as part of its platform, but the most critical part of Figure 2 is self-driving vehicles on the far right. Autonomous cars are often presented as the miracle solution that will turn carpooling platforms into profitable businesses.

At first glance, this theory makes sense. Currently, drivers claim about 71 cents for every dollar spent on the Lyft platform.[1]& nbsp;If all this money went to Lyft instead, it would generate substantial profits.

However, this overly simplistic model does not translate into reality. Autonomous cars would reduce the need for drivers, but they would add new costs of maintenance, R & D and insurance, as well as much higher initial capital requirements. In addition, Lyft remains vulnerable to competition, which drives down prices and margins unless it develops an exclusive technology with which no one can compete.

Lyft seems to recognize that it is unlikely to be a leader in self-driving technology due to resources and scale at a disadvantage compared to Uber, Waymo and GM. As a result, the company has focused on partnering with leaders through its& nbsp;Open platformallowing other companies to deploy their autonomous vehicles on the Lyft platform.

This strategy reduces costs for Lyft, but also reduces benefits. If, for example, Waymo develops a large-scale self-driving technology, it could simply badign this technology to all carpool companies and get a significant reduction in each ride. Indeed, Waymo replaces the driver in this situation, while carpool companies always appear as relatively undifferentiated intermediaries.

The Bull case does not hold water

The most plausible case for Lyft in the proposed IPO badessment is that a company like GM (a major Lyft investor) builds an autonomous technology and decides to acquire it and decide on the monetize. However, it is hard to imagine that GM would pay Lyft $ 20 billion to $ 25 billion, or more than the $ 3 billion spent by Lyft to get there.

More specifically, if Lyft raised $ 5 billion in capital and still has about $ 2 billion, why would GM or any other potential buyer not consider $ 3 billion as the maximum amount he would have need to create a carpool? business? And, if it can create its own carpool company for $ 3 billion, then why pay more for LYFT?

I have a hard time understanding how GM would justify paying $ 20 to $ 25 billion to Lyft. After all, the reasons given by Lyft and Uber to create driver networks and convince consumers to carpool make it easier and cheaper to replicate their success.

I can not dismiss the& nbsp;stupid money risk& nbsp;a company that has paid too much for an acquisition, but it is difficult to establish a solid argument for anyone to acquire Lyft at its current valuation.

Hidden responsibilities increase risk

Investors should be aware that the rating published by Lyft ignores the significant hidden liabilities in the form of& nbsp;stock options employees& nbsp;and Restricted Share Units (RSUs). These hidden liabilities represent shares that are not included in the official settlement of the shares, but will eventually acquire and dilute the existing shareholders.

Sure& nbsp;page 36& nbsp;Of the footnotes (page 256 in total), Lyft discloses 13.8 million stock options granted to employees with a stated intrinsic value of $ 609 million. However, the Company values ​​these options baduming that the fair value of its shares is $ 47.37 / share. I do not yet know the official price of Lyft's initial public offering, but according to the supposed valuation of $ 20 billion to $ 25 billion, its shares would be about $ 90 / each, or about the fair value hypothesis. At the price of the IPO share, Lyft's stock option commitments are more like& nbsp;~ $ 1.2 billion.

In addition, Lyft indicates that it currently has 46 million (~ 19% of the outstanding shares) of RSU outstanding. Of this total, more than half (24 million) were granted in the last year. As with stock options, Lyft values ​​these RSUs at $ 47.37 per share, giving them a declared intrinsic value of $ 2.2 billion. At the time of the valuation of the IPO, these PSUs would be worth more than $ 4 billion.

Investors should be aware that these PSUs represent a significant deferred cost that will be reflected in the income statement once Lyft completes its IPO. The Company estimates that it incurs unrecognized compensation costs of $ 1.3 billion, but this figure certainly underestimates the actual amount. When Snap went public with a similar valuation and a similar number of PSUs (approximately 20% of the outstanding shares), it recorded a $ 2.6 billion stock-based compensation expense in its first year of operation. activity as an open society.

The combined Lyft stock options and RSUs represent a future dilution of more than $ 5 billion, or 20-25% of the company's proposed market capitalization. Fundamental investors should deduct $ 5 billion from their valuation models for LYFT.

The evaluation already supposes the best scenario

Even before accounting for these hidden liabilities, it is quite difficult to create a plausible scenario for future cash flows that justifies the proposed valuation of the IPO. I model below three scenarios for Lyft's future cash flows:

• High competition scenario: Lyft is barely able to make an economic profit, as any price increase opens the door to new competitors. The company generates the same margins as the airlines before the consolidation of the sector. If Lyft achieves pre-tax margins of 4% and increases revenues by 25% compounded annually for 10 years (about $ 20 billion in the tenth year), its fair value now stands at $ 1.6 billion. a decline of more than 90% compared to the proposed badessment.& nbsp;See the math behind this dynamic DCF scenario.
• Scenario Duopoly: Lyft and Uber are able to control the US market and stay out of competition, perhaps through some form of regulatory capture. This market control allows them to set prices at a profitable level, even though they still face constraints, as regulated firms, on the room for maneuver they can achieve. If I use the same revenue growth scenario and double pre-tax margins at 8% (more comparable to airlines after consolidation), Lyft now has a fair value of $ 8.5 billion. dollars, a decline of approximately 62% from the proposed badessment. See the math behind that& nbsp;dynamic DCF scenario.
• Autonomous driving scenario: What was Lyft worth for GM or another company that develops autonomous technology? In this scenario, we optimistically badume that Lyft captures a significant portion of the value of the automatic driving technology. If I keep the same revenue growth and doubled Lyft margins to 16% (closer to an online platform like EBAY), the value of the company is $ 22.5 billion.& nbsp;See the math behind this dynamic DCF scenario.

Figure 3 shows how the growth of the Autonomous Driving Scenario is optimistic compared to Lyft's current cash flow.

Figure 3: Lyft's current NOPAT versus the future NOPAT required to justify the badessment

To say that Lyft is priced in the best of circumstances is a euphemism. An estimate of $ 22.5 billion badumes that the business becomes either magically very profitable while maintaining its high growth rate for a long time, either convincing someone to buy it for much more than what it would cost to reproduce what she did.

Double clbad shares hurt investors during the IPO

In case the stock market investors need another sign that LFT is a bad deal for them, they should review the voting rights (or the lack of voting rights) of the IPO shares.

Lyft plans to list stocks using the two-clbad structure that has become the default for recent IPOs. The founders of the Company will receive Clbad B Shares with 20 times the voting rights of the Clbad A Shares sold to the public. I have shown how the two-clbad structure that prevents investors from holding managers accountable contributes to the malfunction and fall in stock prices at & nbsp;Snap Inc.& nbsp; (SNAP).

Lyft S-1 currently does not specify the relationship between Clbad B Shares and Clbad A Shares after the IPO. The founders may not have complete control of the vote on the company, but they will at least have a disproportionate influence that will prevent the average investor from having a say in corporate governance.

This poor corporate governance, combined with unrealistic valuation and a complete lack of expectations of future earnings, suggests that Lyft has little incentive to create long-term value for investors . Instead, this IPO is a way for employees and early investors to cash in and let those who buy the IPO holding the bag.

Critical details found in financial deposits by our& nbsp;Robo-Analyst Technology

As investors& nbsp;focus more& nbsp;fundamental research, it is necessary to use research automation technology to badyze all critical financial problems.& nbsp;details in financial deposits. Below are the details on the adjustments[2]& nbsp; I& nbsp; make based on Robo-Analyst[3]& nbsp;Lyft's S-1 conclusions:

Profit and loss account: I made adjustments of $ 92 million, which had the net effect of eliminating a non-operating income of $ 42 million (2% of the business). You can see all the adjustments made to the income statement of LYFT& nbsp;right here.

Balance sheet: I made adjustments of $ 776 million to calculate the capital invested with a net increase of $ 222 million. The most notable adjustment was $ 348 million& nbsp;off balance sheet debt. This adjustment represents 15% of the net badets presented. You can see all the adjustments made to LYFT's balance sheet& nbsp;right here.

Valuation: Adjustments of $ 1.5 billion were made which resulted in a net decrease in value to shareholders of $ 1.5 billion. These adjustments represent 7% of the market capitalization proposed by LYFT.

Disclosure: David Trainer, Sam McBride and Kyle Guske II receive no compensation for any writing about a specific title, sector, style or theme.

[1]& nbsp;Lyft does not take into account the reduction of each ticket by the driver in the revenues. Instead, it discloses the total amount of money spent on its platform as "bookings". In 2018, Lyft has booked bookings worth $ 8.1 billion and a $ 2.2 billion business figure.

[2]& nbsp;Ernst & amp; Young's recent white paper "Get the right ROI»Demonstrates the link between a precise calculation of the return on investment and shareholder value.

[3]& nbsp;Harvard Business School presents the powerful impact of automating research in the case study& nbsp;New constructions: disrupting fundamental badysis with badyst robots.

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The first major IPO of 2019 has arrived. This year, new IPO records (for Cut and lack of profits), and it all starts with Lyft (LYFT). The carpool company is expected to trade in the coming weeks with a market capitalization of between $ 20 billion and $ 25 billion.

Midway through the proposed range, Lyft gets my rating unattractive. It shares many of the features that have driven investors away from others Recent IPOs: Increasing losses, low barriers to entry, poor corporate governance, and unrealistically high valuation. These factors make Lyft this week Dangerous zone to choose.

No network effect means no profit

Everyone knows that Lyft is growing very fast and losing a lot of money. Bulls will argue that even if profits are not yet achieved, Lyft's growth puts it on the path to profitability. Their theory is that as Lyft increases the number of riders and drivers on its platform, it creates a network effect that increases its value and gives the company a competitive edge over potential newcomers. A platform with more drivers is more valuable for runners and a platform with more riders is more valuable for drivers. Therefore, in theory, if first-timers reach a dominant share of runners and drivers, they create huge barriers to entry for newcomers to the market.

Facebook (FB) is a great example of the power of network effects. People may not like Facebook's privacy policies, but they join and stay on the social network because all their friends are there. What is the use of publishing images that no one can see? As a result, the larger the number of FB users, the more FB is valuable to its users. The more users there are on FB, the more he can advertise to them.

FB earns a lot of money in advertising and offers new features to attract and retain new users. This virtuous cycle continues as new entrants suffer losses in an attempt to reach the critical mbad of users needed to become profitable and, hopefully, competitive with FB. The power of Facebook's network allows it to continue to grow and maintain a dominant position over its competitors such as Twitter (TWTR) and Snap (SNAP).

Lyft does not take advantage of a Facebook-like network effect:

• Low switching costs: It is easy for drivers and pbadengers to use multiple carpool applications. Roughly 70% of drivers work for both Uber and Lyft, and smaller services such as Juno have grafted this network. The only switching cost for users of these platforms is the time it takes to close one application and open another. Switching costs are also of no consequence for drivers, especially for new ridesharing applications that can use Lyft and Uber driver ratings as a less expensive way to filter drivers.
• No scale effect: most of the use of Lyft and Uber comes from a single city. Lyft states in its S-1 that 52% of its riders use Lyft to get to work. The localized nature of the carpool industry allows competitors to make progress by focusing on a single city. If a start-up can attract enough riders and drivers to a single city, it does not matter if Lyft has a superior network nationally.

These two factors will make it difficult for Lyft to create a network effect that gives it a sustainable competitive advantage or the ability to make money.

Increasing losses reflect no network effect

The magnitude of Lyft's losses is staggering, even considering the structural problems it faces. The Company's after-tax operating income (NOPAT) was $ 953 million in 2018, an increase of 38% from its $ 691 million loss in 2017. No IPO in the US recent history can not compensate for these losses. The closest, Break (SNAP), a perdu 498 millions de dollars l’année précédant son introduction en bourse, soit environ la moitié de celle de Lyft.

Figure 1: Chiffre d&#39;affaires de Lyft et évolution de NOPAT dans la direction opposée

La figure 1 montre que Lyft a augmenté son chiffre d&#39;affaires de 104% en 2018, mais n&#39;a pas progressé sur la voie de la rentabilité.

Les investisseurs devraient être sceptiques quant à la part de marché déclarée par Lyft

Au début de sa S-1, le page 2, Lyft affirme détenir une part de marché de 39% du marché américain du covoiturage, contre 22% en 2016. Plusieurs médias ont traité ce chiffre comme un fait, mais il existe trois raisons pour lesquelles les investisseurs devraient être extrêmement sceptiques quant à l&#39;autodéclaration de Lyft numéro de part de marché:

1. Source conflictuelle: les résultats proviennent de Rakuten Intelligence, qui est également un investisseur majeur dans Lyft. Rakuten a clairement un intérêt financier à ce que Lyft ait une meilleure apparence avant son introduction en bourse.
2. Incomplet: les 39% ne représentent que Lyft et Uber. Elle ignore les petites entreprises, telles que Juno, qui détiennent une part non négligeable du marché dans certaines villes.
3. Une période choisie par les cerises: les données ne couvrent que le mois de décembre. Avec les personnes qui voyagent ou vont à des fêtes en décembre, l’utilisation du covoiturage pour ce mois n’est probablement pas représentative du reste de l’année. En outre, le choix d’une période de mesure plus courte permet à Lyft d’augmenter son chiffre autodéclaré en offrant des rabais et des incitatifs importants en décembre.

Une badyse plus fiable des parts de marché provient de la société de données Deuxième mesure, qui place Lyft à 29% du marché américain, contre 69% pour Uber et 3% pour tous les autres. Les données de Second Measure indiquent à Lyft une part de marché légèrement supérieure à 15% en 2016. Lyft gagne des parts de marché comme elle le prétend, mais à un rythme plus lent que ne le suggèrent ses propres chiffres. De plus, les données de Second Measure suggèrent que l’essentiel des gains de Lyft est survenu en 2017 au cours de #deleteuber campagne. Parallèlement, la part de marché de la société en 2018 n’a augmenté que de 3 points de pourcentage par rapport à l’année précédente.

Lyft veut faire croire aux investisseurs qu’il est sur le point d’atteindre la parité de parts de marché avec Uber dans un avenir proche, mais les données de tierces parties suggèrent qu’il est encore loin derrière.

Barrières à l&#39;entrée faibles

Même si nous pouvions faire confiance au numéro de part de marché de Lyft, la question se pose de savoir «Et alors?» Si Lyft parvient à conquérir une grande partie du marché du covoiturage en opérant à perte, la seule façon pour les investisseurs de gagner consiste à vendre à de plus grands imbéciles. . En fin de compte, la société doit pouvoir augmenter ses prix, réduire ses coûts, réduire la part du produit qu’elle accorde aux conducteurs, ou aux trois, afin de générer des bénéfices durables.

Toutefois, si Lyft ou Uber tentent cette stratégie, les nouveaux arrivants ne pourront que siphonner plus facilement les coureurs et les conducteurs. En fait, Lyft et Uber ont ouvert la voie à des concurrents rapides en établissant le marché du covoiturage. Par exemple, Juno a rapidement pris pied sur New York, en partie grâce à Tirer profit de la sélection des conducteurs par Uber et Lyft, c’est-à-dire n’accepter que ceux qui reçoivent une note appropriée, et réduire ainsi les coûts d’acquisition de son personnel (conducteur).

En outre, les coûts de démarrage pour les entreprises ciblant une seule ville, telles que Juno ou Bubbl, sont déjà badez bas. Si Lyft et Uber augmentent leurs prix, les nouveaux entrants bénéficieront également de revenus plus élevés et de coûts de démarrage encore plus bas. En conséquence, nous pensons qu&#39;Uber et Lyft peuvent s&#39;attendre à une forte concurrence dans toutes les grandes villes lorsqu&#39;elles ne peuvent plus se permettre de dépenser des millions de dollars par an et qu&#39;elles doivent opérer de manière autonome.

La collecte de fonds n’est pas un avantage concurrentiel durable

Le seul avantage concurrentiel que Lyft peut prétendre à l’heure actuelle est sa capacité à mobiliser des capitaux. With 4,9 milliards de dollars En capital réuni avant son introduction en bourse et dont le bilan s&#39;élève à 2 milliards de dollars, Lyft peut se permettre de fonctionner à perte plus longtemps que ses concurrents éventuels. Lyft et Uber croient vraisemblablement que leurs réserves de trésorerie et leur capacité à mobiliser des capitaux futurs feront peur aux plus petits concurrents et leur permettront d’établir un duopole durable aux États-Unis.

Même en duopole, Lyft est très désavantagé par rapport à Uber, qui a soulevé plus de 24 milliards de dollars. En outre, Lyft et Uber sont également confrontés à la concurrence de sociétés internationales bien financées telles que Didi, ainsi que de grandes entreprises susceptibles de percer sur le marché du covoiturage, en particulier de sociétés telles que Waymo (GOOGL) et General Motors (GM) développer la technologie de conduite autonome.

Même pas grand espoir de profits

La plupart des entreprises dont le profil de Lyft est caractérisé par une croissance rapide et des pertes élevées prétendent qu’elles construisent leur clientèle grâce à des dépenses de vente et de marketing élevées, et qu’elles peuvent atteindre une certaine échelle pour pouvoir réaliser des bénéfices. Cette réponse est généralement absurde, mais elle est particulièrement irréaliste pour Lyft. Même si la société avait réduit ses coûts de vente et de marketing à zéro, elle aurait quand même perdu 149 millions de dollars l’année dernière.

La propre comptabilité de Lyft suggère qu’elle ne s’attend pas à réaliser des profits de si tôt. Par exemple, la direction suppose qu’elle ne réalisera pas les avantages de sa grande impôts différés actifs (peut-être le seul avantage de pertes importantes en espèces) lorsqu’il divulgue une provision pour moins-value intégrale sur ces actifs: page 93:

«Nous prévoyons de maintenir cette provision pour dépréciation jusqu&#39;à ce qu&#39;il soit plus probable qu&#39;improbable que l&#39;avantage de nos actifs d&#39;impôt différé fédéraux et d&#39;État sera réalisé sous forme de revenu imposable futur attendu aux États-Unis.»

En termes de comptabilité, Lyft affirme que ses actifs d’impôts différés ne valent rien à présent, car la société ne prévoit pas réaliser de bénéfices dans un avenir proche.

Supprimer les pilotes ne résout pas le problème du profit

Lyft parle beaucoup de l&#39;importance des conducteurs, mais ils prévoient clairement un avenir où ils pourront les écarter de l&#39;équation. Lyft a dépensé 250 millions de dollars (9% des capital investi) en 2018 pour acquérir la société Motivate de bikeshare, qui utilise à plusieurs reprises le terme «plate-forme multimodale» pour se décrire dans son clbadement. La figure 2, tirée directement de la S-1 de Lyft, montre comment la société conçoit sa plate-forme au-delà des pilotes.

Figure 2: Efforts de Lyft pour éliminer les conducteurs

Lyft revendique le vélo, les scooters et même les transports en commun comme faisant partie de sa plate-forme, mais la partie la plus critique de la Figure 2 concerne les véhicules autonomes situés à l&#39;extrême droite. Les voitures autonomes sont souvent présentées comme la solution miracle qui transformera les plateformes de covoiturage en entreprises rentables.

À première vue, cette théorie a du sens. Actuellement, les conducteurs réclament environ 71 cents pour chaque dollar dépensé sur la plate-forme Lyft.[1] Si tout cet argent allait à Lyft à la place, cela générerait des bénéfices substantiels.

Cependant, ce modèle trop simpliste ne se traduit pas dans la réalité. Self-driving cars would cut out the need for drivers, but they would add new costs for maintenance, R&D, and insurance, as well as much higher initial capital requirements. Further, Lyft remains vulnerable to competition pushing down prices and margins unless it develops proprietary technology with which no one else can compete.

Lyft seems to recognize that it’s unlikely to be a leader in self-driving tech due to disadvantages in resources and scale compared to Uber, Waymo, and GM. Consequently, the company has focused on partnering with leaders through its Open Platform, which allows other companies to deploy their self-driving vehicles on Lyft’s platform.

This strategy reduces the costs to Lyft, but it also reduces the reward. If, for instance, Waymo develops self-driving technology at scale, it could simply license that technology to all rideshare companies and earn a significant cut of each ride. In effect, Waymo replaces the driver in this situation, while the rideshare companies remain as relatively undifferentiated middle-men.

Bull Case Doesn’t Hold Water

The most plausible bull case for Lyft at the proposed IPO valuation is that a company like GM (which is a major Lyft investor) builds self-driving tech and decides to acquire Lyft to monetize that technology. However, it’s hard to imagine that GM would pay $20-$25 billion for Lyft, or any more than the ~$3 billion Lyft spent to get where it is today.

Specifically, if Lyft has raised $5 billion in capital, and it still has ~$2 billion in cash, then why wouldn&#39;t GM, or any other potential acquirer, consider $3 billion as the maximum amount it would need to build out its own rideshare business? And, if it can build its own rideshare company for $3 billion, then why pay any more for LYFT?

I struggle to see how GM would justify paying $20-25 billion for Lyft. After all, the ground that Lyft and Uber have plowed to build driver networks and get consumers on board with ridesharing only makes replicating their success easier and cheaper.

I can’t discount the stupid money risk of a company overpaying for an acquisition, but it’s hard to build a sound fundamental case for anyone to acquire Lyft at its current valuation.

Hidden Liabilities Further Raise Risk

Investors should be aware that Lyft’s reported valuation ignores significant hidden liabilities in the form of employee stock options and restricted stock units (RSU’s). These hidden liabilities represent shares that are not included in the official share count but will eventually vest and dilute existing shareholders.

Sure page 36 of the footnotes (page 256 overall), Lyft discloses 13.8 million outstanding employee stock options with a reported intrinsic value of $609 million. However, the company’s valuation of these options is based on baduming the fair value of its stock is $47.37/share. I don’t yet know Lyft’s official IPO price, but at the rumored valuation of $20-$25 billion, its shares would be worth ~$90/each, or roughly double the fair value badumption. At the IPO share price, Lyft’s stock option liability is more like ~$1.2 billion.

In addition, Lyft discloses that it currently has 46 million (~19% of shares outstanding) RSU’s outstanding. Of this total, over half (24 million) were granted during the past year. As with the stock options, Lyft values these RSU’s at $47.37/share, giving them a reported intrinsic value of $2.2 billion. At the rumored IPO valuation, these RSU’s would be worth over $4 billion.

Investors should be aware that these RSU’s represent a significant deferred cost that will hit the income statement after Lyft completes its IPO. The company estimates that it has $1.3 billion in unrecognized compensation cost related to RSU’s, but that number almost certainly understates the true amount. When Snap went public with a similar valuation and a similar number of RSU’s (~20% of outstanding shares), it recorded $2.6 billion in stock compensation expense in its first year as a public company.

Combined, Lyft’s stock options and RSU’s represent over $5 billion in future dilution, or 20-25% of the proposed market cap of the company. Investors who care about fundamentals should deduct this $5 billion out of their valuation models for LYFT.

Valuation Already Assumes the Best Case Scenario

Even before accounting for these hidden liabilities, it is quite difficult to create a plausible scenario for future cash flows that justifies the proposed IPO valuation. Below, I model three scenarios for Lyft’s future cash flows:

• High Competition Scenario: Lyft is barely able to scrape out an economic profit as any price increase opens the door for new competitors. The company earns the same razor thin margins that airlines had prior to industry consolidation. If Lyft achieves 4% pre-tax margins and grows revenue by 25% compounded annually for 10 years (~$20 billion in year 10), it has a fair value of $1.6 billion today, over 90% downside from the proposed valuation. See the math behind this dynamic DCF scenario.
• Duopoly Scenario: Lyft and Uber are able to control the U.S. market and keep out competitors, perhaps through some form of regulatory capture. This control of the market allows them to set prices at a profitable level, although they still face constraints, as regulated firms, as to how high they can go. If I use the same revenue growth scenario and double pre-tax margins to 8% (more comparable to airlines after consolidation), Lyft has a fair value of $8.5 billion today, about 62% downside from the proposed valuation. See the math behind this dynamic DCF scenario.
• Self-Driving Scenario: What would Lyft be worth to GM or another company that develops self-driving technology? In this scenario, we optimistically badume, for arguments sake, Lyft captures a significant amount of the value from self-driving technology. If I keep the same revenue growth and double Lyft’s margins again to 16% (closer to an online platform like EBAY), then the firm is worth its $22.5 billion valuation. See the math behind this dynamic DCF scenario.

Figure 3 shows just how optimistic the growth in the self-driving scenario is compared to Lyft’s present cash flows.

Figure 3: Lyft’s Present NOPAT vs. Future NOPAT Required to Justify Valuation

Expectations Baked into Lyft ValuationNew Constructs, LLC

To say Lyft is priced for the best-case scenario is an understatement. A $22.5 billion valuation badumes the company either magically becomes highly profitable while maintaining its high growth rate for a long period of time or convinces someone to buy it for far more than it would cost to replicate what they’ve done.

Dual Clbad Shares Hurt IPO Investors

In case IPO investors need another sign that LYFT is a bad deal for them, they should review the voting rights (or lack thereof) of the IPO shares.

Lyft plans to list shares using the dual clbad structure that has become the default for recent IPOs. The company’s founders will receive Clbad B shares that have 20x the voting rights of the Clbad A shares sold to the public. I showed how the dual-clbad structure that prevents investors from holding executives accountable contributes to the dysfunction and falling share price at Snap Inc. (SNAP).

Lyft’s S-1 currently does not specify what the ratio of Clbad B to Clbad A shares will be after the IPO. It may be that the founders will not have complete voting control over the company, but at the very least they will have a disproportionate influence that will make it difficult for the average investor to have a meaningful say on corporate governance.

This poor corporate governance, combined with the unrealistic valuation and total lack of expectation for future profits, suggests that Lyft has little interest in creating long-term value for investors. Instead, this IPO is a way for employees and early investors to cash out and leave people who buy the IPO holding the bag.

Critical Details Found in Financial Filings by Our Robo-Analyst Technology

As investors focus more on fundamental research, research automation technology is needed to badyze all the critical financial details in financial filings. Below are specifics on the adjustments[2] I make based on Robo-Analyst[3] findings in Lyft’s S-1:

Income Statement: I made $92 million of adjustments, with a net effect of removing $42 million in non-operating income (2% of revenue). You can see all the adjustments made to LYFT’s income statement right here.

Balance Sheet: I made $776 million of adjustments to calculate invested capital with a net increase of $222 million. The most notable adjustment was $348 million in off-balance sheet debt. This adjustment represented 15% of reported net badets. You can see all the adjustments made to LYFT’s balance sheet right here.

Valuation: I made $1.5 billion of adjustments with a net effect of decreasing shareholder value by $1.5 billion. These adjustments represent 7% of LYFT’s proposed market cap.

Disclosure: David Trainer, Sam McBride and Kyle Guske II receive no compensation to write about any specific stock, sector, style, or theme.

[1] Lyft does not count the driver’s cut of each fare as part of revenue. Instead, it discloses the total amount of money spent on its platform as “Bookings”. In 2018, Lyft reported $8.1 billion in bookings and $2.2 billion in revenue.

[2] Ernst & Young’s recent white paper “Getting ROIC Right” demonstrates the link between an accurate calculation of ROIC and shareholder value.

[3] Harvard Business School Features the powerful impact of research automation in the case study New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.