What is Lyft (NASDAQ:LYFT) worth? Less than two weeks after the Lyft IPO, it’s a nearly impossible question to answer. LYFT stock can’t be valued on an earnings basis, since it’s losing money. Price-to-sales multiples generally are much less accurate, and there’s the obvious problem of to which companies LYFT should be compared.
Is the roughly 9x price/revenue multiple assigned LYFT stock reasonable, given that software stocks like Veeva Systems (NYSE:VEEV) and Twilio (NYSE:TWLO) trade at 20x+? Or does the fact that Lyft is a distant second in market share to rival Uber suggest that a discount is merited?
More broadly, how much money is Lyft going to make, if any? When? For all the noise about the Lyft IPO, that’s the key question. And again it’s impossible to answer. Any model is going to have a hefty dose of the “garbage in, garbage out” problem: the inputs of the model are based on an investor’s prediction. The variance among those predictions is part of why LYFT stock has been so volatile in its first few sessions on the public market.
Even considering that difficulty, there are a few key aspects of the Lyft model that might drive investor sentiments, particularly over the next few quarters. An investor has to believe it can at worst maintain its market share as Uber tries to recover from past missteps. She likely has to be optimistic that Lyft can expand beyond North America. Because whatever an investor’s opinion, Lyft clearly needs to keep growing even if not quite at the insane rates of the past two years.
But there’s one really interesting question that gets to the heart of the bull case for Lyft.
What’s Driving Lyft’s Growth?
There’s a reason Lyft has garnered a roughly $20 billion valuation: its growth has been sensational. Per figures from the company’s registration statement, revenue rose from $343 million in 2016 to $2.16 billion last year a sixfold increase. That includes just over 100% growth in 2018.
What’s interesting about that growth rate is how Lyft has achieved it. First, Lyft is generating more revenue per ride. In 2016, revenue was 18% of bookings. For the ridesharing business, bookings essentially are the amount charged to customers, excluding costs like tolls and tips. Revenue excludes driver commissions. Two years later, the figure was 26.8%. Lyft cites better matching, more effective driver incentives and fewer customer promotions as driving the improvement.
In part because of that improvement, revenue per active rider (any customer who takes a ride at least once during the quarter) is increasing as well. The figure nearly doubled to $36.04 between Q4 2016 and Q4 2018.
But there’s one interesting metric that hasn’t really moved: rides per active rider. Lyft doesn’t break out the metric, but we can calculate it using its figures. In Q1 2016, Lyft had 3.5 million active riders who, on average, used the service 8.3 times during the quarter. In Q4 2018, the active base was more than five times larger, at 18.6 million. Those users took a Lyft 9.6 times each.
That’s basically the only metric that isn’t showing exponential growth. But it might be on the most important measuring stocks for Lyft going forward.
More Rides = Higher LYFT Stock Price?
The reason that metric is important for LYFT is that the long-term bull case requires that the company (and the industry) take an ever-increasing share of overall transportation spend. As Lyft points out, annual personal transportation costs in the U.S. alone are $1.2 trillion.
If Lyft can take, say, 5% of that total, bookings would be $60 billion annually. Revenue likely would be in the range of $20 billion, almost 10x the 2018 figure. And LYFT stock almost certainly would be worth more than $20 billion and likely much, much more.
But that in turn requires that U.S. consumers significantly change their behavior. It means that active riders can’t use Lyft roughly three times a month, as they do now. Rather, more riders need to use it more regularly, perhaps as an essential part of their commute. It requires that a material portion of U.S. consumers give up their cars and choose Lyft.
That shift often is discussed in the context of the shift to autonomous vehicles, a potential trend that also impacts stocks like Tesla (NASDAQ:TSLA), Alphabet (NASDAQ:GOOG,GOOGL), and even chipmaker Nvidia (NASDAQ:NVDA). But it doesn’t necessarily require self-driving cars to arrive in the next few years.
In fact, self-driving cars may not even matter. It may come down to consumer choice.
Buy the Lyft IPO?
It’s far, far too simple to say that LYFT stock will come down to how many rides its active users take. There are myriad factors going on here. And if and when autonomous driving does arrive en masse, it likely will drive down costs, making ridesharing more economical and driving up usage.
Still, this is a stock that is going to require quite a bit of patience and will take years to even sniff profitability. That means for the next few years, revenue growth is going to be key. And with Lyft’s geographic reach now expanded nationwide, it’s going to need usage to rise to drive at least some of that growth.
Those who think Lyft is going to stay just a rarely-used taxi service might want to stay skeptical toward LYFT stock. At the very least, investors should watch Lyft’s numbers closely to see if the trend toward ridesharing is accelerating. If it doesn’t, LYFT might have a problem.
As of this writing, Vince Martin has no positions in any securities mentioned.