Heavy Lyft-ing


The future, so they say, is with the new economy. New ways of doing things will replace all the old ways in short order. But to do this, you’ve got to displace the existing system. Sometimes innovation brings something never seen before (think Amazon) or provides new ways of doing the same ol’ thing.

That last is the challenge facing the new breed of taxi companies. Sorry, they don’t call them that. They’re different. They’re the future. Taxis are so avant-siècle. The new disrupters are the ride-hailing services delivered via the internet that link passengers to drivers who provide their own vehicles. As with most of the new world we’re rapidly moving into, what’s not to like?

It may be fun for passengers to sit in the backseat and watch those little dice hanging from the rear-view mirror swing from left to right and back again as the car careens through the traffic towards their destination. No, not the casualty department, where they originally planned to go. They’re popular, they say, with millennials. Which just goes to show…

But will they be popular with investors? Are millions going to be bowled over by the experience of being chauffeured around in a souped up Fiesta? And abandon all other forms of transport? That and pretty much that is the only reason for the fancy tabs being placed on the likes of Uber and Lyft and their ilk.

Well, investors in the stock market are about to be able to play taxi themselves as this item from the BBC tells us:

Lyft, the ride-hailing company, has revealed that it is yet to make a profit ahead of an initial public offering (IPO) which could value the firm at between $20bn and $25bn.

No profit? Well, that’s a bit of a problem, then. But wait a minute (or a second as Tim would say being slightly more on the impatient side than we are), won’t the firm eventually make money?

According to the BBC report, we find that:

In its prospectus, Lyft published detailed financials for the first time, showing that while revenue rose to $2.2bn in 2018, losses grew to $911.3m. It will join New York’s Nasdaq and its stock market symbol will be Lyft. Lyft is currently valued at $15bn, just seven years after it was founded by technology entrepreneurs John Zimmer and Logan Green.

Both Uber and Lyft are currently private businesses backed by those deep-pocketed investors in Silicon Valley. Going public (that is listing on a stock exchange) turns those private shares into publicly listed ones. There’ll be a liquidity bonus to existing investors and—Hurrah! Hurrah! —they can now sell off their stake to new investors. Mugs perhaps may be the better term.

Let’s look at this with a bit of financial logic. There are few barriers to entry to becoming an Uber or a Lyft. Or one of the other ones out there (e.g. Groundlink, Grab, Gett, and Didi Chuxing). It’s not, to use a nice phrase from Warren Buffett, as if Lyft have a deep moat around the business providing them with a nice little rent over and above that pure competition stuff of normal return. No sirree. All these new firms are pretty much interchangeable. You just need a few more apps from the store.

Now look at where Lyft is. Sales of $2.2 billion in 2018. OK, that’s up – and up a lot – on 2017 when they made $1.1 billion. But think of it this way. For every dollar of sales at the moment, Lyft is losing about 42 cents. It’s better than the previous year when it was 63 cents and $2 in 2016. And this is seven years into the venture. Seven years. There’s something biblical about that number.

The smart reader will realise that if Lyft keeps going at the rate it is, when sales reach $5 billion or so, they might start to turn a profit. A tiny profit.

But consider what’s involved. Those salesy things are the income they generate from their services. While the competition is eating away at any possible monopoly profits. Now unless the world changes in a way that makes us eat the Fedora, there’s a limit to the number of rides that can be demanded. There’re also those Fiesta owners out there willing to hire themselves out as chauffeurs. Lyft are—to use a term Tim likes to bandy about like candy—going to run up against resource and market constraints. We’ve got an app on our smartphone that does the Lyft thingy with the olde worldly taxi companies. What’s the difference? Hard to say, really. But the black or yellow cabbies are the existing incumbents and they’ve got to be overcome for the new ride-hailing internet firms to reach a profitable position in the market.

A competitive market will be good. Good for customers. Cheap rides will increase the market somewhat. But there’s still the economics of operating a vehicle and being paid to do so. Squeeze the drivers too much and—well, they’re off to the competition or in front of the tele, reducing that important pool—Lyft will find itself without a key resource.

Lyft is constrained by other ride-hailing ventures, market size, and the economics of taxi services. It’s no surprise, as Tim points out here taxi services operate nice ‘n’ profitable when they’re cartelised. When there’s open competition and a commoditised business, it ain’t so profitable.

Can Lyft make it? Of course, it might. We’re economists here, not prophets. But the outlook looks daunting. Lyft’s backers have sunk $5.1 billion to date into a venture that—seven years in—is still loss making and making sales of $2.2 billion. One can understand why Lyft’s backers might want to suck in the dumb money via an initial public offering while they bail out. And being first puts them at the head of the queue for a handout.

Now anyone want a fast ride to nowhere? Can we offer you a Lyft?