Lyft IPO: why a trillion dollar valuation is possible — one day

There are lots of reasons for investors to feel anxious about the Lyft IPO, the largest IPO since 2014, but there is one very good reason to give it a second look.

Article updated: 29 March 2019 11:00am Author: Michael Baxter

When Google was floated, its valuation seemed absurd. Many cited the ‘mad hype’ associated with the company showed how markets had lost touch with reality. They failed to grasp that Google, or Alphabet as we now call it, had a truly remarkable business model, one that could enable it to dominate the global advertising market. Now Lyft is coming to the stock market, and it is not hard to list reasons to stay away. And yet, it is possible, but let me emphasise that word ‘possible’, that the market Lyft operates in could eventually dwarf the size of the global advertising business. This is a market that could throw up the biggest company in the world within a few years. So do shares in Lyft represent an elevator ride to stock market riches for investors?

Lyft is in the ride sharing business, it’s Uber’s main rival. But up to now has focused on the North American market. Its IPO is kicking off the day this article is written. It is thought that the Uber IPO will follow soon, along with a glut of other techs including Slack (B2B productivity and collaboration tool) Pinterest (image sharing) and Airbnb (‘nuff said’).

The company enjoyed a revenue of $2.16 billion in 2018, but made a loss of $911 million. That means for every dollar in revenue, it made a loss of around 42 cents.

I gather that making a profit is quite important for companies these days, although for years, Amazon pushed that idea to its limit.

Bull

I will come to the big bull case in a moment, for now, I just want to focus on the growth — revenue doubled in 2018 compared to the year before, the number of active users increased five-fold. It has benefited from the negative publicity associated with Uber.

Bear

Where does one begin? The loss is huge, and since the company is hell-bent on expansion, not likely to reverse any time soon. Some have argued that it might never be profitable.

There is another issue: the share structure. Although co-founders Logan Green and John Zimmer only own five per cent of the company, they will have 50 per cent of shareholder votes.

The bigger story

But Lyft, like Uber has a bigger fish to fry.

Autonomous cars are happening. The 2020s will be the decade that sees their emergence. Because autonomous cars will be substantially safer than traditional cars, their rise will be rapid. At first, the media will highlight every accident involving an autonomous car, but during the first few years of the next decade, the message will slowly penetrate the public consciousness that cars driven by people see more accidents. Once this message has been fully absorbed, the market for autonomous cars will become enormous. Traditional cars will be seen as dangerous.

And the rise of autonomous cars will transform the business model of the car sharing industry. If you live in a city, and an increasing number of people do, why own a car when you can call one whenever you want?

If you are like me, and live in the sticks, the case for owning a car will be stronger. Even so, I suspect even us country or semi-rural dwellers will find such an array of car sharing options that we will question the rationale of owning a car.

We will see different cars for different purposes. Travelling offices, travelling meeting areas, cars for sleeping in whilst our AI driver takes us on a long journey, and functional cars for travelling shorter distances.

It is possible that any company which becomes a key player in this space will eventually enjoy a massive valuation and indeed profits.

What will the biggest company in the world look like in 2030? It may well be operating in the autonomous car sharing market, it may even be Lyft or Uber.

The catch

I do have a nagging doubt, and it relates to competition. Whether the likes of Lyft or Uber can eventually become trillion dollar companies — which to be clear, I think is possible — depends on margins.

Will we discover that lift sharing is a natural monopoly, meaning there won’t be room for both Lyft and Uber?

Or will pricing become super competitive? Will we find that margins in this business become too slim for big profits.

Will car sharing eventually be seen as a public utility? In which case, will regulators dictate pricing to the car sharing companies, severely clipping their, as it were, wings?

The answer to these questions will determine the ultimate fate of Lyft.

I would not be surprised to see shares fall over in the next year or so; I would not be surprised to see their share price increase at an Apple/Amazon trajectory over the next ten years.

Remember where you read this first.


These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

See what else we have to say