How Long Can Lyft Stay Unprofitable?
Lyft reported its 1st quarter earnings on Tuesday and surprise surprise, they lost a boat-load of money. Income was adversely impacted by a one-time $864 million stock-based compensation expense, but still, losing a billion dollars in one quarter is never a good thing.
Here are the highlights from the release:
Revenue of $776 million, up 95% YoY.
20.5 million riders, up 46% YoY
Net loss of $1.138 billion ($274 million without one-time expense)
The bulk of this piece is going to evaluate how long Lyft can continue being unprofitable, but for any newbies to the stock, I want to go over the basics of Lyft’s financials. First, you should know that Lyft has been operating at a loss since its inception, essentially selling rides for $12 when it costs them $17. Second, you should know that revenue has been growing at a brisk pace but net losses still haven’t improved much if at all:
That’s one ugly-looking chart. It should also be noted that Lyft spends about 35% of its sales on marketing, a number that is likely not sustainable and will need to go down in the coming quarters. We’ll see if revenue growth comes down with it.
So How Long Can Lyft Keep up These Losses?
If we look at Lyft’s balance sheet at the end of Q1 2019, they had around $1.38 billion in current assets, with most of that being in cash equivalents. They are also guiding for over $1 billion in EBITDA losses in 2019 (which are almost always less than net losses), meaning they will most likely have to raise money through a debt or equity offering sometime in 2020.
That would solve Lyft’s short-term problem: cash. The long-term problem is who will give it and/or how many times it will be available in the future.
It is likely that they will be able to raise capital for the next few years as long as the stock stays up and the top-line continues to grow. However, at some point, Lyft will have to generate an operating profit. And there are two ways they can achieve this: by cutting costs or raising prices.
The simplest way for Lyft to start generating a profit is if they raise prices on rides. Right now they are selling at a huge discount with tons of monthly promotions as they try and add riders as fast as possible. Their top line growth is impressive, but right now Lyft is basically selling riders dollar bills for 90 cents, and you can do that a billion times over and never make any real money.
At any time Lyft could raise prices (most likely in increments until they are 50% higher than today’s levels) and they would instantly improve operating margins. The problem is, because of the stiff pricing competition from Uber, they cannot raise prices for fear of slowing sales and user growth. And with Lyft’s valuation (7x sales multiple) slowing revenue growth could be detrimental to the stock.
For anyone that says Lyft will be able to raise prices as they create network effects, you’re misleading yourself because ride-sharing does not get more profitable with scale. The software businesses that typically come out of Silicon Valley can scale at extremely high margins because of low variable costs. Lyft, with their high variable costs, is not one of those businesses.
So if raising prices is likely out of the question, the only other option Lyft has is to cut down on expenses. One easy way to cut costs is to not give out $864 million in stock options, an absurd amount for a company of this size.
Another way to trim losses would be to pay drivers less, but this seems unlikely since they already pay them scraps. If the recent news is any indicator, drivers will continue to press for higher wages which will further eat into Lyft’s bottom line.
If it looks like Lyft is going to have a hard time making money, that’s because they are. Profitability, in my opinion, will only happen if they can produce one thing: self-driving vehicles.
Why Do They Need Self Driving?
Experts think that fully-autonomous vehicles (no, Elon Musk is not an expert on the subject) are still a few years if not decades away. However, they have just started to arrive on a limited basis, with Lyft being one of the main players. In a Medium post sent out in concurrence with the earnings release, Waymo announced 10 of their self-driving cars will be available through Lyft in the Phoenix area.
This Waymo partnership could prove crucial for Lyft. Why? Because if you don’t have to pay drivers, the cost-per-ride will go down substantially. Yes, they will still have to pay Waymo to use the technology, but that will cost less than a human driver.
From my purview, self-driving is the only way for Lyft to become profitable, or at the very least, a high margin business. Personally, that is a scary thought. The entire model is betting on one unproven technology in order to be successful. Investors should be wary of this when paying 7x sales for this stock. Sure, if autonomous vehicles prove to be as lucrative as we think, then Lyft stock could be a winner. But if not, anyone betting on the company could be in for a world of hurt.
Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.