Buying into an IPO or shortly after it can present investors with really attractive (though often volatile) prospects. For those interested in some of the hottest tech/service trends today, Lyft (LYFT) offers IPO-oriented investors an opportunity to own an interesting company that, on the public market at least, is a one of a kind today. In reviewing the firm’s financials, the business quite frankly looks like a black hole for money, but when you look at its growth rates and the composition of its expenses, it’s not unreasonable to think that while there is a great deal of risk in owning the enterprise, it could, years from now, serve as a viable firm that will reward shareholders attractively over the long run.
An interesting company with strong growth
Although Lyft has historically taken a back seat to Uber (UBER) in terms of size and brand awareness, this doesn’t mean the company is small. According to the firm’s prospectus, the company’s services currently reach an estimated 95% of the US population, plus it has some exposure throughout Canada as well. Since inception, the company has seen its drivers generate over $10 billion in income, and due to the nature of the business, it has proven especially attractive for those needing transportation who live in and/or work in low-income areas (44% of the company’s rides either start or end in a low-income area).
Taken from Lyft
While $10 billion seems like a great deal of cash, it represents a paltry amount, even including its own take, of the $1.2 trillion spent on transportation by US consumers every year. This significant market size has granted the company plenty of upside potential in the long run, and management has not failed to capitalize on this. Back in the first quarter of the firm’s 2016 fiscal year, for instance, it gave out 29 million rides to 3.5 million active riders. By the fourth quarter of 2018, these figures had grown significantly, rising to 178.4 million rides during the quarter being taken by 18.6 million active riders.
Taken from Lyft
Not only has activity soared over the past few years, but the company has also seen spending from its users increase at a nice clip. Back in the first quarter of its 2016 fiscal year, the company’s revenue per active rider came out to $15.88. This number has risen almost every single quarter (only in one quarter did we see a decline) since then, and in the fourth quarter of last year, it came out to $36.04 per active rider.
Taken from Lyft
As a result of these favorable metrics, the revenue picture for Lyft has been astonishing. In 2016, sales recorded by the firm were $343.30 million. Two years later, in 2018, revenue had 528.2%, shooting up to $2.16 billion. This is great for shareholders, but one significant negative here stems from the company’s bottom line. The net loss recorded by Lyft has also grown over time, rising from $682.79 million to $911.34 million. As companies grow, you want to see them move closer to profitability, not just on a margin basis like management has demonstrated, but on an absolute basis as well.
A path toward prosperity
A personal fear I have regarding high-priced tech companies is that they will never become profitable, or that if they do, then it won’t be to a degree that’s high enough to justify their valuation. The financial results for Lyft today indicate that profitability is undoubtedly still a concern, meaning this fear exists for me and other like-minded investors, but there is ample evidence that the firm’s picture is improving at a nice clip.
Created by Author
If you look at the graph above, for instance, you can see Lyft’s operating cash flow over the past three years. While net losses have widened alongside revenue growth, operating cash flow has gone from a negative $487.16 million in 2016 to negative $280.67 million in 2018. This on its own is a positive development for the business, but in addition to actual dollar improvements, there are elements that comprise Lyft’s business structure that point to the potential for even stronger cash flows in the years to come.
In addition to the aforementioned revenue growth per active rider, number of rides, and number of active riders, we also have data on riders by year. In the image below, for instance, you will see a breakdown of riders who have joined Lyft in 2015, 2016, 2017, and 2018. In addition to seeing strong growth that is greater than each preceding year for each new year that comes along, the cohort of older riders continues to rely on the company and its services more every year. This is evidence of a strong and dedicated user base, and it gives credence to management’s claim that over 300,000 Lyft riders have given up their cars since becoming customers. This almost cult-like reliance (and growth from) older users, combined with continued strong upside from new ones, is a double-win because it suggests more future growth ahead for the firm and a low churn rate from existing ones.
Taken from Lyft
On the cost structure side, there are two points of encouragement. First and foremost is the fact that, according to management, of the $1.24 billion in costs classified as cost of revenue last year, the major part (but we don’t know a specific dollar amount) can be attributed to insurance costs on its drivers. In 2017 compared to 2016, the cost of insurance rose $201.1 million, while in 2018 the cost rose a further $318.6 million. The growth in sales for the firm was 103.5%, while the growth in insurance costs appears to be lower than that on a percentage basis. Another improvement was on the payment processing piece of cost. This figure increased by $140.3 million in 2017 compared to 2016, but it rose by just $109.6 million in 2018 versus 2017. As the company captures additional economies of scale, it will likely be able to pressure both of these significant cost items down over time, at least in relation to sales.
Lyft is a compelling opportunity for growth-oriented investors, and based on what data we have today, the company has an excellent business model that keeps users dedicated and coming back for more. Unfortunately, profitability is a major issue at the moment and management must eventually address that (because not only is that a question of viability, but it will also prove to be a major factor in causing share price volatility). That said, I am encouraged by the cash flow improvements in the business, and I believe that so long as the company can continue to apply pressures to some of its key costs, then it could make for a good prospect for very long-term investors who don’t mind facing meaningful amounts of volatility.
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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.