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Lyft: My IPO Valuation


Investment Thesis

Shares of Lyft, Inc. (LYFT), a fast-growing transportation network company, are going to get listed on the Nasdaq stock exchange before its bigger rival, the more famous Uber (UBER). Even though taxi space has been historically a challenging place for finding black figures on the bottom line, Lyft’s exceptional top-line growth testifies the concept is fundamentally viable.

Corporate profile

Lyft is an on-demand transportation network company, facilitating ride-sharing and ride-hailing services in the United States and Canada. As of December 31, 2018, the company had approximately 4,680 full-time employees (which is approximately 3.2x more than it had in December 2016). The company also operates a network of shared bicycles and scooters in selected cities to address the needs of people who are looking for short trips. Besides a ride-sharing technology platform, the company also provides insurance protection for its drivers and customers.

”Think of not only the technology, but also the product. Technology can get you excited day-to-day, but in the long run, you’ll only have an impact when you built a successful product.” – Ashesh Jain, Head of Perception

Lyft’s background story in brief

Originally called Zimride, Lyft’s early beginnings can be attributed to a college car-sharing project. Frustrated by local public transport and being stuck in traffic, Logan Green, a student of the University of California, Santa Barbara, came up with a car-sharing program for over 2,000 people largely across college campuses. After finishing his studies, Green sourced additional inspiration from a trip to Zimbabwe where he observed locals utilizing crowdsourced minivan taxis. Using the Facebook API, Green, alongside John Zimmer, created an app in honor of Zimbabwe’s carpooling network. In 2013, the business reincorporated as Lyft with the aim of a more frequent engagement with its users.

Founders-led company

According to conclusions of several academic studies, companies with their founder in the role of the CEO or other considerable influence on the business tend to substantially outperform their lacking-founder-as-a-CEO peers. Three years ago, global management consulting company Bain & Co. analyzed a few hundred founder-led companies and identified three elements that set them companies apart: a business insurgency, a front-line obsession and an owner’s mindset. As already mentioned in the paragraph above, the founders of Lyft are Logan Green and John Zimmer, who seem to have a clear vision for the company and an uncanny ability to execute.

How much is Lyft worth?

In the light of revenue variation of popular Peter Lynch’s earnings line for the projection of probable per share values of the company, I see Lyft’s IPO as very attractive. According to my model assuming 75 percent annual revenue growth decreasing by 10 percent each year, 227 million shares outstanding (219 million shares of common stock originating from convertible preferred stock + 8.6 million of the common stock issued as RSUs) diluting at 10 percent annual rate and an average price-to-sales (P/S) ratio of 5x, the company’s intrinsic value by the end of 2022 is forecasted to reach $210 USD. If the company’s shares get bought at 10x price-to-sales multiple, the company’s long run potential could lie well above 10 percent. Should the price-to-sales multiple be rather lower, let’s say 5x, the company’s shares could offer a positive annualized rate of return potential of more than 20 percent.

Source: Author’s own Excel model

Key risks

  • The company’s limited operating history makes it difficult to accurately access the company’s future prospects.
  • The company operates in a highly competitive environment and can lose its market share if it operates inefficiently.
  • If the company fails to attract and retain qualified drivers, increase utilization of its platform by existing drivers, its financial condition and operations could be harmed.
  • The company relies on third-party insurance policies, which can negatively impact the company’s revenues and operating results.
  • The company is subject to a wide range of laws and regulations, many of which are evolving and may differ in various countries.
  • If the company fails to efficiently develop its own autonomous vehicle or develop partnerships in a timely manner, its financial results and operations may be negatively affected.
  • If the company’s security systems are breached, the company’s reputation may be harmed.
  • The company may become a subject to litigation, government investigations or other proceedings that may adversely affect the business.
  • If the company fails to further develop its network of shared bikes and scooters, its business development efforts may be negatively impacted.
  • The company relies on a number of third parties and if they fail to provide their services in a timely and efficient manner, its operations may be negatively impacted.
  • If the company fails to successfully develop new offerings on its platform and enhance existing ones, the company’s operations can be adversely affected.
  • If the company fails to effectively manage complexities of its technology platform, its financial condition and results of operations could be adversely affected.
  • If the company fails to effectively manage its upfront pricing methodology, its financial condition and results of operations could be adversely affected.
  • Hurricanes, tornados, tsunamis and other natural, social or political disasters can negatively impact the company’s business and financial results.

The bottom line

To sum up, Lyft, accordingly targeting a $20-$25B IPO, according to people familiar with the matter, is likely to offer an unparalleled long run entry opportunity even if its shares’ IPO price hit the higher range of valuation estimates. According to my simple price-to-sales model, under this scenario, the shares could still carry up to 20 percent annualized return potential if the company’s revenue growth will sustain its high pace for a while. The important question, however, remains whether Lyft can achieve profitability. Despite a sophisticated pricing algorithm, the company will probably have a hard way turning its bottom line into the black as it has to face tough competition and varied regulatory demands in different jurisdictions. I believe the only thing that can help the company ‘lyft off’ red figures is its brand, which can become a powerful moat.

Disclaimer: Please note that this article has an informative purpose, expresses its author’s opinion, and does not constitute investment recommendation or advice. The author does not know individual investor’s circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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