Do new tech IPOs reflect a peak of the bull market, or herald the transportation equivalent of Amazon? Our companies analyst gives his opinion.
In a test of narrative power versus whopping financial losses, so-called "ride-hailing" or "ridesharing" giants Uber and Lyft have rivalled each other to list on the New York Stock Exchange – Lyft got there first.
Both capture the spirit of the times, connecting taxi drivers to passengers via their mobile phone apps which generate revenue from drivers, and proclaim a revolution that cuts the cost of car ownership. Is there substance worth engaging here, with traders backing sentiment and investors banking on profits?
Initially, the reception is warm: despite renewed stock market volatility, Lyft raised its flotation price range from $65-69 a share to $70-72, eventually pricing the offer at the top of the range. That valued the business at $24.3 billion (£18.6 billion), despite a rising trend in net losses to $900 million last year.
Uber's global reach and myriad plans - flying cars included - are expected to justify a market value of up to $120 billion which compares with $124 billion for IBM (NYSE:IBM) which makes around $9 billion annual net profit, and $140 billion for McDonalds (NYSE:MCD) which makes $6 billion a year.
Echoes of the late 1990s tech-stock boom?
A conservative view would be that such valuations are symptomatic of a fake financial environment, particularly when compared to long-established businesses of proven earning power - recall in the late 1990s tech-boom when relatively new companies like Autonomy floated and quickly outstripped those of much greater financial substance and track record.
Memories of how the dotcom bubble ended in a debacle have since faded, and leaders of that tech boom are virtually forgotten.
Certainly, I'd flag caution about how the proclaimed "worth" of Lyft and Uber has been "established" in a similar way as pre-flotation values pre-millennium. Rounds of equity financing have ratcheted up notional share prices based partly on (paid-for) investment bank projections and demand by investors eager for a place at the new party.
In fairness, and as Lyft gets its float away, a well-presented analyst - apparently from an independent firm of stockbrokers - cited "granular" analysis that his team made of Lyft's prospectus, to derive a $75 per share value target. This is highly speculative when not even Lyft's management can say when it will make a profit.
Uber's potential as "the Amazon of transportation"
Lest I appear prissy, Amazon (NASDAQ:AMZN) has shown how a stock can near 30-bag over a decade before profits manifest – and which then spectacularly beat expectations.
Founded in 1994, Amazon last year achieved $11.2 billion profit and is structured to pay no federal tax. It applied its e-commerce core towards advertising and cloud computing and, though seeming quite radical, such businesses are profitable and growing strongly, helping offset Amazon's losses on its international side amid expansion.
In due respect, since founding in 2009, Uber has established a strong brand image covering some 600 cities in over 70 countries – despite a reputation in the UK for legal controversy over the self-employed status of its drivers.
The CEO speaks of becoming "the Amazon of transportation and movement" by capitalising on its initial customer base in ridesharing, extending it also to offer commuter options such as electric bikes and scooters, Uber Freight enabling carriers and drivers to fix bookings, and Uber Eats already providing food delivery to about three-quarters of the US population.
Mind how such diverse expansion means ongoing investment, thus deferring the overall point of group profitability and making the stock complex to value and prone to sentiment shifts.
2018 saw adjusted losses reduce 15% to $1.8 billion on revenue up 43% to $11.3 billion, albeit slowing on 2017. Moreover, the fourth quarter of 2018 saw like-for-like revenue growth of 25% versus 38% in the third quarter. An adjusted loss of $768 million in the fourth quarter was mitigated by a $358 million tax credit.
More positively in terms of narrative, management has had a shake-up after years of controversy; a professional CEO taking over from the founder in late 2017, disposing of the Russian and Southeast Asian businesses and recruiting a chief financial officer and chief operating officer to hone the business for flotation.
Lyft focuses more specifically on ridesharing
Founded in 2012, Lyft has grown its US market share versus Uber, from 22% in 2016 to 39% in 2018. Last year it booked $2.2 billion of revenue on $8.1 billion worth of rides (showing the margin of using its service). However, losses rose to $911 million from $688 million in 2017 and $683 million in 2016.
Moreover, there is no guidance as to when profits may be achieved. "Expenses are likely to increase with expansion into new offerings, platforms and markets...which may be more costly than we expect and not result in growth," it says.
Not surprisingly, the prospectus emphasises a potentially vast ridesharing market within $1.2 trillion spent annually in the US on personal transport, about $9,500 per household.
Substantially all of this is on cars that are used only 5% of the time, and are otherwise parked. The bull case for Lyft is thus encapsulated in management's slogan how "the world is at the beginning of a shift away from car ownership to Transportation-as-a-Service." The prospectus declares:
"Cities should be built for people, not cars... Mass car ownership strains our cities and reduces the very freedom that cars once provided."
Certainly, there looks to be scope to extend this further, especially for urban-dwellers, yet the motor car is well-established as a tool for personal liberation and status. Car ownership is hard-wired into modern culture, often for practical reasons like "the school run". Timing pick-ups for leisure use may not work so well beyond calling a cab with friends after the pub.
Individualistic or small group transport may suit US consumers, but if, say, other governments shift leftward, there could be renewed promotion of public transport, especially to ease congestion. Ride-sharing may, however, fare well in a US society with rising wealth polarisation, where some people give up on the hefty cost of buying/running a vehicle for occasional use.
So, there is a rationale for Lyft continuing to grow but, if insufficiently to generate profits, then a stock de-rating (further out) is possible as speculators give up hope.
For now, the 2018 balance sheet shows Lyft's cash position declined from $1.1 billion to $508 million. Management says it should meet working capital and capex over at least the next 12 months. Before, final terms of the flotation were confirmed, the prospectus shows some blank spaces, but extra funds raised will certainly bolster needs beyond this period.
Right at the back of the prospectus there is some detail on funding rounds, where it appears Lyft has raised a total $4.9 billion over 18 rounds – lastly in June 2018 when institutions put in $600 million at a benchmarked $15.1 billion valuation, the company's value doubling in the previous 14 months.
It's been a great ride for those on investment bank client lists: time will tell, as in the late 1990s tech-stock funding rounds, whether the market affirms valuations sustainably.
If you want to speculate, Uber has potential
Neither proposition is really what I look for, by way of definitive earnings, but I respect the market is likely to give Uber the benefit of the doubt – to see if its app can be leveraged into different services, as "Amazon 2.0".
Lyft has received a decent stock market reception and is gaining on Uber in terms of share. But it will be interesting to uncover the extent of institutional profit-taking after private financing rounds.
These two giants of ridesharing do appear to have established an oligopoly for now, though I question what real moat exists around "taxi by smartphone". India has its own taxi-hailing giant called Ola, founded in 2011 and operating in 110 cities globally, and is working with local authorities for UK national coverage.
Historically, taxi services have involved high competition which keeps prices around a standard, with demand highly cyclical. For such reasons, a group linked to taxi services has never before floated, yet the smartphone revolution has changed that.
My current sense is of Lyft being a short to medium-term play, notwithstanding risks of institutional profit-taking and market setback, the baton possibly passing to Uber when its flotation entertains hope of a wider smartphone-oriented transportation group.
The two will then battle to prove in stock market terms, which strategy offers better risk/reward.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
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