"Can Uber Ever Deliver? Part Eighteen: Lyft’s IPO Prospectus Tells Investors That It Has No Idea How Ridesharing Could Ever Be Profitable"

From naked capitalism:

By Hubert Horan, who has 40 years of experience in the management and regulation of transportation companies (primarily airlines). Horan has no financial links with any urban car service industry competitors, investors or regulators, or any firms that work on behalf of industry participants

Can Silicon Valley investors create $125-150 billion in ridesharing market value out of thin air?
This series, since the first Naked Capitalism post in 2016, has focused on Uber as the dominant and strategically pioneering ridesharing company, and as the only source of public data that could support independent analysis of ridesharing economics.

Last Friday, March 1st, Lyft issued its Form S-1, also known as a prospectus[1], significantly expanding our base of objective data about ridesharing. This post will analyze Lyft’s key   claims. Reports indicate that Lyft is pursuing an IPO value of $20-25 billion, while Uber may be pursuing as much as $125 billion from its upcoming IPO.
Uber claimed that the “ridesharing” industry it had pioneered had substantially superior economics based on major technological innovations that explained its disruption of the traditional taxi/urban car service industry. This series presented evidence showing that those claims were nonsense and that ridesharing companies were actually less efficient than the traditional companies they were driving out of business.

It is important to understand Uber and the other privately-owned ridesharing companies since   their impacts extend far beyond urban transport. One of the central themes of this series is that they have (and will continue to) significantly reduce overall economic welfare, and represent a major attack on the idea that the actions of consumers and investors in competitive markets can allocate capital to more productive uses.

The critical characteristic of ridesharing companies (such as US based Uber and Lyft, or Asian based Didi, Grab or Ola) has nothing to do with smartphone apps or competitive advantage or operational efficiency. It is the fact that they are backed by billions in cash from venture capitalists who have been willing to subsidize years of massive losses. Instead of consumers choosing the most efficient car service, those subsidies led them to choose the company that didn’t charge them for the actual cost of the service, and provided far more capacity than could be economically justified. Instead of funding the companies with the strongest sustainable competitive advantage, those subsidies led investors to fund the companies with the artificially inflated growth rates that suggested a path to quasi-monopoly market dominance.

Under private ownership, the claims that the ridesharing companies had created unprecedented levels of economic value ($70 billion for Uber, $15 billion for Lyft) had never been subject to any broad-based analyst or investor scrutiny. This series has argued that the unprecedented accomplishment of ridesharing is that its entire valuation was manufactured out of thin air. The valuation of other large Silicon Valley based companies (Amazon, Facebook) may be seriously inflated, but they had clearly established legitimate economic foundations, including powerful product and operational innovations, profits and strong cash flow.

This series has documented that Uber has no economic foundation, aside from its predatory use of billions in subsidies. None of its claimed technological innovations allowed it to produce car service at lower cost than incumbents, or create sustainable advantages over future competitors. It would still require billions in new efficiencies to reach operational breakeven, and billions more to economically justify the funding its investors provided. [2]

Lyft’s IPO kicks off the endgame of the “ridesharing” corporate value creation process
As discussed in Part Seventeen of this series [3], both Uber and Lyft filed preliminary, confidential prospectus data with the Securities and Exchange Commission in December, kicking off a race as to who would go public first. Travis Kalanick did not feel Uber was ready to face full capital market scrutiny, triggering a rebellion of Board members who impatient for actual returns on their investment. Kalanick was replaced by Dara Khosrowshahi in late 2017, who committed to take Uber public in the fourth quarter of 2019. Lyft wanted to go public first, to avoid the expected glut of IPOs this year (including Pinterest, Slack, Postmates and Airbnb) and to minimize direct comparisons with Uber. When word leaked that Lyft was targeting a first quarter IPO, Uber accelerated its filing plans but Lyft won the race.

The public release of Lyft’s S-1 filing will be followed (apparently starting the week of March 18th) with a series of investor roadshows. Based on investor feedback, Lyft and its lead investment bankers (JP Morgan, Credit Suisse and Jefferies) will set final prices and terms, and the date for the actual IPO.

Last Friday was the first time investors ever had the chance to review actual Lyft financial results. In the next few weeks they will have to decide whether they want to risk real money on the chance that Lyft’s value will continue to appreciate above the IPO price. If investors line up to buy Lyft stock at the company’s hoped-for $20-25 billion valuation, then the efforts to create ridesharing value out of thin air have succeeded, and it will make it much easier to Uber to achieve a strong valuation. Significant investor resistance to Lyft’s valuation objectives could cause serious problems for both companies, and could possibly burst the widespread public perceptions about ridesharing.
Four key questions potential Lyft IPO investors will want the S-1 to answer

1. Does the prospectus provide data showing that Lyft have a clear path to convert its current losses into ongoing, growing profits? Is there data showing exactly which factors (e.g. the ability to raise prices, the ability to capture market share, the ability to increase operational efficiency due to scale economics or new innovations) are likely to drive years of profit improvement?
2. Is there data showing that aggregate demand for ridesharing is likely to grow strongly for many years? What might drive future demand growth (expansion into untapped markets, the ability to continually lower prices, capturing demand currently using other transport modes)?
3. If Lyft could achieve sustainable profitability in its core ridesharing market, is there evidence showing how it could leverage its existing infrastructure and rapidly build profitable positions in other markets?
4. As Uber will always be larger, is there evidence showing that both a primary and secondary competitor can profitably coexist without ongoing destructive market share battles?

Lyft’s prospectus doesn’t answer any of these questions
Lyft’s prospectus provides absolute no data demonstrating that it has the ability to profitably raise prices over time, increase operational efficiency or win significantly greater market share. It cites “growing the rider base” as the first plank of its future growth strategy, but provides no data showing what it thinks its current share of the market is, no estimates of future aggregate market growth, no evidence of what might drive that growth, and no explanation of what its future growth potential might be. Lyft makes no attempt to lay out a possible path to future profitability, or even a timeline as to when breakeven might be achieved....MUCH MORE