On Lyft Inc’s (NASDAQ:LYFT) second day of trading, the NYTimes DealBook’s Briefing led with “Lyft shares come back down to earth.”
Dealbook further reported,
“[S]hares in Lyft fell 12 percent, to $69.01, below their I.P.O. price … Other tech companies with big losses, like Groupon, Twitter and Snap, have suffered the same fate, but it took a while — almost two weeks, for Groupon.”
The note was just another example of the media’s short-term outlook. The desire to write a punchy headline outweighed actual, in-depth analysis.
Sure enough, over the course of the following three days after the post, LYFT stock rose steadily and closed above the $72 IPO price at $74.40 (above the initial range of $62 to $68 per share, indicating strong demand). It was a good reminder that near-term choppiness in price action does not necessarily indicate lackluster future results.
Quite the opposite, in fact, for LYFT stock.
LYFT Is a Disrupting Force
A common theme I abide by in tech investing is to invest in disruption. Innovation coupled with financial discipline and execution drives growth and returns.
LYFT is disrupting the transportation industry. In 2018 alone, it booked over a billion rides, generating $2.2 billion in revenue. Uber and LYFT have been and are continuing to revolutionize transportation. And no, they don’t own any vehicles. Instead, they are leading the Transportation-as-a-Service (TaaS) revolution. Software really is eating the world.
LYFT Stock Has a Long Runway
Transportation may be a fact of life, but it’s not a particularly riveting one. What is exciting though, is when you take a look at the size of the whole pie: The total addressable market (TAM) is $1.2 trillion. That’s a pretty big pie.
For some context, in 2017, transportation was the second-largest household expenditure after housing and it was almost twice as large as healthcare and three times as large as entertainment.
That trillion plus dollars only applies to the U.S. market too. Recall that LYFT is only active in the U.S. and Canada at the moment, but their technology is eminently scalable. The world is their oyster, so that addressable market figure is conservative.
Furthermore, LYFT claims that it is “still in the very early phases of capturing this massive opportunity. In 2016, ridesharing accounted for just one percent of the vehicle miles traveled in the United States.”
In tech, the idea of industries that encourage a winner-take-all scenario are numerous. Right now, the clear leaders in the TaaS space are LYFT and Uber, and an oligopoly is not a bad situation to be in despite the economic theory implications of this type of market structure. Barring collusion on prices though, the competition makes LYFT unable to rest on its laurels for even a second –LYFT generated revenues of $343 million in 2016, tripling to $1.1 billion in 2017, and then doubling to $2.2 billion last year.
The year-over-year growth figures of 209% from 2016 to 2017 and 103% from 2017 to 2018 are simply astounding. This spurs constant innovation and product improvement, meaning that the moat gets dug deeper. At this point, it’s hard to imagine a small upstart becoming a threat to LYFT or Uber.
LYFT Stock Will Appreciate Despite Losing Money
The big bold headline surrounding LYFT is that the company lost $911 million last year, up from $688 million in 2017.
Frankly, it’s a bit of a surprise to see investors concerned over profits in the wake of Amazon (NASDAQ:AMZN), which convinced Wall Street that growth was the new profit.
The fact is that the paradigm for tech investing contrasts to other industries that may not experience the same rapidity of innovation. While, LYFT can’t say for certain when it will turn a profit, given its intent to invest in autonomous vehicle technology, it seems odd to penalize a company built on disruption for investing in technology that would disrupt their industry. I would not expect these concerns to weigh on LYFT stock if it continues to post market share gains alongside top-line gains.
The fact is that while LYFT stock performance will undoubtedly be an influential factor in the pricing of future tech offerings, volatility in share price cannot be the determining factor of whether or not LYFT is a good long-term investment. Myopia will lead readers to overlook a compelling long-term investment.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.
