Twelve months from now, Lyft shares will trade much, much lower than today. Note: Predicting is dangerous work, so if I’m wrong, I’d ask that you love me, not judge me. But I digress.
In the new economy, IPOs are luxury items with the key attribute people grossly overpay for: the illusion of scarcity. There are half as many publicly traded firms as there were 20 years ago, and most new economy firms have found the private markets have all of the taste (liquidity, rich valuations) without any of the calories (disclosures, reporting, SEC filings, transparency, analysts using rational valuation models, etc.). Unregulated monopolies kill/acquire promising young firms in the crib, resulting in scant IPOs.
Lyft’s prospectus sounds like a CFO grabbed the mic at an AOC fundraiser — littered with terms like “social impact” and “carbon offsets.” This is a bit of an illusionist’s trick, as Lyft’s admirable focus on the environment wallpapers over the real emissions of ride hailing: a transfer of wealth from drivers to riders. The “gig economy” is Latin for an erosion in minimum wage protection or the notion that firms should provide benefits to workers. The payoff, according to these firms, and the drivers, is worker flexibility. However, as someone who’s hired hundreds of employees and contractors, the notion that a firm cannot provide flexibility and insurance to employees is simply not true. However, compliance with labor laws sucks, as it’s expensive. Like all of big tech, expensive (non-scaleable) translates to “impossible” for these firms.
The “gig” economy (what a cute word) has been more fuel for a dynamic that’s hollowing out the middle class. Employment has never been stronger — all you need is a smartphone and a car, and you’ve got a job. But wages have been flat for 30 years. Prosperity without progress is a decent description of our economy the last decade(s). The ninja move kicking the middle class in the nuts is best typified by ride-hailing firms. Uber commands a $120 billion valuation, meaning the firm garners the same value as:
- American Airlines
- Matson, and
- Royal Caribbean … COMBINED.
What is Embraer? Embraer is an awesome firm, based in Brazil, that’s the third-largest manufacturer of civil aircraft behind Boeing and Airbus. They make a twin-engine private jet called the Praetor 500 (hello precious). The Praetor is a sleek two-bedroom apartment that can skim across the surface of the atmosphere at 80% the speed of sound. Once the revolution begins and my talents as a university professor are finally realized, my salary will increase 17,000%, and I will buy a Praetor for $17 million. This will include the (no joke) “Bossa Nova” interior option, club seating, and a three-person divan. That’s almost full asking price. When negotiating for a jet, it’s good to leave a little cabbage on the table.
Armed with the Praetor, I will be at SXSW, and over dinner I’ll casually offer Anand Giridharadas and Kara Swisher a ride back to NYC… on my Praetor. At that exact moment, I become almost good looking and 100% fascinating. On the ride back, we drink… a lot. Kara doesn’t drink, but she drinks on my Praetor 500. I aspire for both of them to like, even love me, as they are uber-interesting and have great hair — hugely important. After admiring the curvature of the Earth, in my Praetor, we come up with nicknames for Anand (Nando, A-Nando-Mous) and ask Kara questions about lesbian sex (I have a lot of questions). Note: the last sentence is likely several hate crimes on several levels. But I digress.
So, Uber commands the value of a large chunk of the global transportation industry, and employs 16,000 people, vs. 568,000 combined for the transportation firms listed above. Lyft has approximately 4,600 employees and 1.4 million drivers. Uber and Lyft are companies where 20,000 (mostly white, mostly college educated, mostly male) employees and investors will sequester $150 billion in shareholder value from the 5 million (mostly non-white, mostly non-college grad) employees they’ve classified as “contractors.” Both firms have made noises about giving drivers equity. The operative term is “noise.” Lyft, to their credit, is giving drivers who have 10,000 rides $1,000 in cash to buy stock (a dime a ride) and $10,000 if they’ve logged 20,000 rides (50c/ride).
When retail investors stampede through the door marked “disruptor” on the first day of trading (“disrupt” was mentioned 10 times in Lyft’s prospectus), the market value could hit 10–15 times 2018 revenues. In 2018, Lyft clocked $2.2 billion in revenues and lost $911 million. That means if you pay $12 for a ride in a car with a pink moustache, it cost the firm $17. So, it’s economically irresponsible not to take Lyft (or Uber) everywhere.
Firms that trade at over 10 times revenues have several things in common:
— Explosive growth
— Recurring revenue
— Network effects
Lyft has the first (2018 revenue doubled YOY), but doors 2 and 3 are the stuff of Amazon, Netflix, Facebook, Microsoft, and WeChat. Despite using the term “network effect” 7 times in the prospectus, there is no network effect here. There admittedly could be scale, but not the Instagram-like network effect where every person who joins is likely to bring their friends with them and will interact with a lot of other users. My taking a Lyft tonight creates scale, but no flywheel effect similar to when I search for where to eat. Searching and clicking on Google informs the algorithm, making the next search one three-billionth better for the next person using Google.
Lyft should, and will, be valued at a multiple of EBITDA (vs. revenues) soon. Their scale can/may get them to profitability. But their charade around network effects will result in a different valuation construct that, like every other great transportation firm, will value them at 6–12x EBITDA (maybe $35/share in 5 years if they execute well). Maybe.
Tech’s Real Talent
As the founders of Lyft pretend they are saving the planet while accidentally becoming billionaires, the roadshow/sermon is forced to relocate from SF to another city, as the entrance is blocked by protestors representing 98% of the firm’s workforce. The real talent that’s evolved over the last decade in the tech community is not mastery of technology, business models, or building cultures of creativity. Instead, tech’s genius is fostering the unfettered belief that they are “making the world a better place.”
When you get in the back of a car with an internal combustion engine, driven by one of 1.4 million drivers getting a dime as their share of the $20–30 billion value they’ve helped create, who don’t have health insurance or minimum wage protection, you can palliate your conscience, as the firm has purchased carbon offsets.
Life is so rich,