Lyft S-1 — My Thoughts

I love taking a look at companies S1 filings. I’m an amateur at these things and enjoy seeing a look at how a successful startup has been run. While the S-1 filing doesn’t always predicate the future, key metrics within the S-1 reveals how much more work is required for the business to be a long standing institution in our economy. Strong S-1’s like Atlassian reveals a strong subscription business with low churn while Snap’s filing reveals a business that still had a lot of work to do on its business model & engagement with advertisers. Here’s my quick thoughts on the Lyft S-1.

Financials

So in the S-1, I always flip first to the P&L. While many people immediately point to the increasing loss year of year to nearly $1B last year, the ratios of these numbers and how they are trending year to year is what I care about. I did a quick spreadsheet so we can see how the ratios of each of these metrics compared to revenue is trending. A few big things pop out.

1 — Is this a software business?

Margin for the business is improving year over year however their margin began at a horrendous 19%. Usually software businesses have extremely high margins and while margins have been improving to 42%, this is extremely low compared to other software businesses. This cements for me that Lyft is a transportation business vs a software business.

2 — Is profitability possible?

I usually don’t worry about this when looking at an S-1 due to the long time startups at taking to launch on the public markets. However with Lyft, I’m not seeing the exact path as G&A expenses have leveled off at 21% of revenue, Ops & support have leveled off at 16%, and R&D is static at 14%. Adding these up, we can expect 51% of revenue will be invested in these categories over the next few years. The biggest expense is marketing which is also decreasing in ratio to revenue at an amazing rate to 37% of revenue last year. So if cost of revenue could decrease to 30% over the next few years, 70% of revenue would be left to fund operations.

So run some quick math to figure out the ratios for profitability — 70% - (51% static costs) = 19% left to sales and marketing which would pencil out if Lyft was a clear market winner. However this is very much so not the case. Lyft and Uber are getting ready for a fight symbolized with rivaling IPO’s. Stiff competition usually yields margin compression and increased sales & marketing spend in my consumer products world and I believe this applies to the consumer transportation field as well (think about airlines). I don’t see profitability for Lyft for a very, very, very long time.

3 — Valuation and Bookings

From a startup founder perspective, our ability to raise capital depends on how good of story we can tell about our company. We generally present KPI’s that are an exponential graph up and to the right like this:

These metrics don’t have to be GAAP and are usually key number that we are running the business on. Sometimes they are numbers that just make the company look good like the number of app downloads. Lyft has done a good job of converting the company to focus on GAAP metrics and we can see that the company is improving the amount of booking revenue they are capturing which is helping with their Cost of Revenue ratio.

This would be incredibly encouraging if Lyft was able to continue to improve the % of bookings revenue they are able to capture but Winter is coming & I believe that Lyft will have to continue their fight with Uber & other new entrants to retain drivers.

With a $15.1B valuation in their last round, it will be interesting at what price Lyft will go out at. While there could be a story that their margin will continue to increase, due to competition I believe they will not be able to grab substantially more revenue as a % of bookings vs their current 26.8% (without self driving cars which is an entirely different can of worms). If this was a software business, a 10x multiple would be well deserved but I’m not convinced at this stage that Lyft is a high margin software business & I don’t see the path to profitability for a very long time.