Lyft: Self Driving Cars Won’t Save It

• I don’t believe Lyft will have the best self driving
• I don’t believe Lyft be able to sustain growth by 2021/2022 to fully realize self driving cars as part of its platform (at the earliest)
• I believe long term (20+ years), building self driving technology will be a commodity similar to how building an app is today.

As we all know, Lyft recently IPO’d and the stock is doing not so well. But why? And how can Lyft get its stock price back on track?

We must first understand the Silicon Valley mantra, “Growth at all costs”. Hidden behind this quote are many different meanings of the end result of growth. If you’re an early stage company, growth can equate to product market fit. If you’re a mid-stage company, growth can equate to grabbing market share from incumbents or realizing a path to $1 billion. Here’s where it gets interesting: if you’re a late stage company, growth can equate to a monopoly. As a monopoly, this is where you truly extract value from your consumers and generate massive profits.

At the end of the day, every company wants to be a natural monopoly. You get most of the market share, you have less competition, and you get to make mistakes without many consequences. Google is a great example of this, absolutely dominating search queries. Note that because Google’s Search is so good and they’ve been growing so fast, I would consider them a natural monopoly. No one has a better search than Google.

This is where Lyft, as a mid-stage company quickly transitioning to a late stage company, is really shining: growth. Lyft had over 100% growth in revenue from 2017 to 2018. But the key problem lies in future profit potential: most of their growth is fueled by venture capital money. Lyft lost $911 million in 2018 even though they made $2.2 billion in revenue. To put it plainly, Lyft spent over $3 billion in 2018 alone paying employees, marketing, and subsidizing rides (plus many, many other costs). This means that for every $1 Lyft earns in revenue, they spend about $1.50. Another key thing to note here is that revenue does not account for the full cost of the ride, but a percentage of the total fare paid to Lyft. The rest of the fare is paid to the driver. Lyft’s revenue does not include fares paid to drivers.

The key question becomes can Lyft ever make a profit? And self driving cars just might be the answer to that.

It’s become pretty apparent that Lyft is battling with Uber for market share and growth. Whoever stops subsidizing rides first will see their growth plummet and future earnings potential with it. (Question we won’t answer today: how much “growth” is there left overall?) The first company to focus on profits instead of growth may see a bump in earnings in the short term, but long term all the passengers will migrate to the cheaper platform and thus a natural monopoly will have formed.

This is where self driving cars come in. At current ride sharing prices, a majority of the fare goes towards the driver. However, if the driver is a robot and doesn’t take a fare, then 100% of the fare can go towards Lyft, which is essentially what it’s riding on 😉. It’s hoping to keep fare prices the same but capture a larger part of the fare, which will help it grow revenue and get to profitability.

However, this is where I believe self driving cars will not save Lyft. Currently, developing self driving car technology is not easy. It takes a lot of time and resources to develop this tech. I don’t think self driving tech will be as good as a human driver nor regulated within 3 years. Most car companies believe some form of self driving will be on the road by 2021 but that’s at the earliest. I personally believe most “basic” highway self driving will be finished and regulated by 2021 at the earliest but not urban driving. And urban driving is where I’d argue Lyft / Uber make most of their money. I only have anecdotal data but most rides I’ve seen are short, urban rides, getting from one place to another when users don’t have cars. And owning a car doesn’t make sense in the city.

So that means Lyft has to survive AND grow by 2021 at the earliest if it wants to take advantage of self driving tech. As far as I can tell, Lyft raised about $2.3 billion in its IPO. Without knowing exactly how much cash in the bank it has, Lyft will probably barely squeeze into 2021 if it manages to keep its yearly losses steady at $900 million. Best case scenario, Lyft survives until 2021/2022 and quickly implements urban self driving tech.

But just as all technology grows and becomes easier to implement, so will self driving technology. What happens in 10–20 years when it’s just as easy to build/buy a self driving car as it is to build an app today? Won’t Uber and other future competitors, with their own self driving tech, be able to compete against Lyft? Won’t it again, be about growth and offering the cheapest prices to attract consumers? Will Lyft be able to build the best self driving technology and offer a superior product, similar to Google Search?

In my personal opinion, I don’t think Lyft will have the best self driving (my early prediction is Waymo) nor do I believe Lyft be able to sustain growth by 2021/2022 to fully realize self driving cars as part of its platform. I also believe long term (20+ years), building self driving technology will be a commodity similar to how building an app is today. I also believe there will be “off the shelf” self driving technology you can buy, similar to software you can buy today.

Remember, when you are investing in Lyft, you’re investing in future earnings potential (since they have no profit today) through reducing costs and massively increasing revenue, which is probably through self driving cars. So at the end of the day, be sure to thank your driver and some venture capitalists as they’re currently subsidizing your rides.