26 March 2019

Bloomberg: “Lyft Confirms What We Know and What We Don’t”

Optimists can point to the fast rate of growth, which has outpaced the rate of cost increases. The negative 40 percent operating margin was a drastic improvement from a negative 76 percent margin in early 2017. The company seems to be getting better efficiencies from some its spending, and that kind of operating leverage may eventually allow Lyft to generate tidy profits.

On the pessimistic side, I was surprised at the scale of Lyft’s costs for items like insurance, credit-card payments and expenses to run its technology systems. Those costs eat up more than half of Lyft’s reported revenue, and it shows that on-demand rides may never have the type of high-margin profits that investors love in internet and software companies. This is a company that doesn’t have to spend to produce a physical product yet has the gross margins of a clothing retailer.

But for me, this is the biggest unknown about Uber and Lyft: How big is this market? About 12 percent of people in a recent Deloitte survey said they use on-demand ride services such as Lyft at least once a week. That number decreased from an earlier survey. That relatively small share is either good news — Lyft and Uber have a large untapped market particularly outside of big cities — or a sign that even with the oodles of money that Lyft and Uber spend on subsidizing fares and marketing to attract drivers, the natural demand for on-demand rides isn’t that big.

Shira Ovide

It’s pretty remarkable for a company to warn it may not be able to achieve or sustain profitability in the future, when profit is the primary mission of any normal business. And the numbers shared so far don’t contradict this extraordinary statement: as Lyft was able to grow revenues, operating costs have grown at a similar pace. Maybe, just maybe, this means that public transportation is difficult, if not impossible, to run as a for-profit enterprise, and it should simply be a public service, funded by local taxes – a concept that will be hard to swallow for Americans.

Lyft preliminary IPO numbers

This naturally has implications for its major rival Uber, as well as for other companies in the transportation business, like Tesla, and Elon Musk’s other initiatives, the Boring Company and the Hyperloop. Hard to imagine any of these will achieve better profitability – especially something like The Boring Company, which requires massive investment in infrastructure – in the absence of massive cost reductions. As Shira rightly points out in a follow-up article, if the magic solution is self-driving cars, investors will have to wait a long time before getting any return on investment.

As a share of its revenue, Lyft’s costs have come down and the company’s losses have narrowed, although they’re still high. I also looked at what the company is spending for each product it sells, which is a ride. On that basis, Lyft’s expenses are getting worse.

Lyft doesn’t break out costs in quite this way, but it discloses enough to calculate this: At the beginning of 2017, the company spent $4.31 per ride on insurance, processing credit-card payments, customer support staff, investments in driverless cars, advertising and other expenses.

Fast forward to the fourth quarter of 2018, and the cost per ride had increased to an average of $5.27. For full years, the average cost for each ride declined from 2016 to 2017, but rose last year.

Shira Ovide

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