In one of the most anticipated IPOs in recent memory, ride-sharing giant Lyft (NASDAQ:LYFT) went public at $72 per share in late March. Due to all the hype, the Lyft IPO started off well. Then things got bad. LYFT stock opened up 20% above its IPO price.
That rally fizzled out. The stock closed up less than 10% on its first day, which is pretty weak as far highly anticipated IPOs are concerned. Then, on Day 2, LYFT stock dropped more than 10% and fell below its IPO price, notching a 20%-plus fall in two days from its opening price.
Is LYFT Stock Overhyped?
The consensus thesis out there is that the IPO was over-hyped, the company was overvalued, and that long term profitability and growth concerns will ultimately keep a lid on how high this stock can go. Right now, with LYFT stock acting like a falling knife, that thesis looks pretty compelling.
But, I’m willing to play the contrarian here. I think that thesis is overdone. The bear thesis has momentum right now, so LYFT stock will keep dropping in the near term. But, the long term should play out much differently.
If you zoom out, the big picture fundamentals here are very healthy. I think Lyft has a reasonable opportunity to hit $4 billion in profits within the next decade as ride-sharing becomes a North American norm. Against that backdrop, Lyft’s current valuation (~$20 billion) looks like a steal.
As such, I think this “Lyft IPO was over-hyped” thesis is actually way more over-hyped than the IPO itself. In the long run, Lyft has a unique opportunity to be a very big and very important company. That’s why I’m taking advantage of this rampant selling. Fundamentals will ultimately put an end to it, and drive Lyft stock materially higher in the long run.
Lyft’s Growth Opportunity Is Large
In order to keep it succinct, I’ve compacted the long term LYFT bull thesis into five bullet points. Those bullet points are as follows:
- The sharing economy is the future, and ride-share is a big part of that movement. Perhaps the biggest trend of this century is the sharing economy trend, which essentially comprises democratizing single-supplier ecosystems and turning them into multi-supplier ecosystems. The aim is to match supply with demand and improve consumer and supplier outcomes (read more about it here). Ride-sharing, is a big part of this movement, since it takes driving services (formerly provided by the few), makes it something provided by the many, and in so doing, dramatically reduces costs and improves convenience. Because of this, ride-sharing will only grow in adoption and usage by leaps and bounds over the next several years.
- Ride-sharing currently comprises a very small portion of the transportation market. Despite the cost and convenience advantages that ride-sharing presents over car ownership, it still represents a tiny portion of the transportation market. According to Lyft’s S-1, ride-sharing accounted for just 1% of total vehicle miles traveled in the United States in 2016. That’s tiny, and it means that the market at scale could/will be much, much larger than it is today.
- There are only two players in the North America, and Lyft is the faster grower by far. Everyone’s worried about competition in the market, but there are only two players (Uber and Lyft) in the North America ride-sharing market. Thus, there actually isn’t much competition, and the market should be big enough to accommodate both players at scale (think Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) in the cloud, or Walmart (NYSE:WMT) and Target (NYSE:TGT) in retail). Further, Lyft is the faster grower of the two, and has expanded its U.S. market share from ~10% four years ago, to 30% today.
- Every metric at Lyft is trending in the right direction with healthy momentum. Everywhere you look, Lyft’s financials point to robust growth. The active rider base has grown immensely from 3.5 million riders in early 2016, to nearly 20 million riders today. During that same stretch, revenue per active rider has risen from ~$16 to ~$36, and average quarterly rides per rider has risen from ~8 to ~10. Bookings growth is running north of 75%. Revenues are doubling year-over-year. Contribution margin has risen from 24% in 2016, to nearly 43% last year. Opex rates have dropped from ~220% to ~90% during that same stretch.
- Lyft can be immensely profitable without self driving. There’s this rumor floating around that Lyft can’t be profitable unless it comes up with self-driving. That’s not true. Lyft exited 2018 at 45%-plus contribution margins. That rate is growing. It should hit 50%-plus at scale. As such, the only way this company doesn’t net a profit is if the opex rate is north of 50% at scale. Lyft is only scratching the surface of its revenue potential today, and the opex rate is already below 90%. At scale, it will definitely be below 50%, and likely closer to 30-40%. Thus, Lyft without self-driving could still be a very profitable company.
Long Term Fundamentals and LYFT Stock
Summing up the five aforementioned bullet points, Lyft is the rapid grower in a very large yet could be much larger North America ride-share market, with exceptionally healthy operational momentum and a reasonable opportunity to have sizable profit margins at scale. In numbers, that translates as follows:
- The North America ride-share market could hit 200 million riders one day. Using Lyft publicly available data and Second Measure market share data, one can assume that the ride-sharing market in U.S. and Canada measured 44 million riders at the end of 2016 (~12% penetration) and 60 million-plus riders at the end of 2018 (~17% penetration). At scale, this market could easily hit 50% penetration as car ownership rates drop and reliance on ride-sharing grows. Assuming combined U.S. and Canada population grows to 400 million by 2030, then that implies a ride-share market of ~200 million riders.
- The number of Lyft riders could hit 70 million. Lyft’s U.S. market share has risen by over three-fold over the past four years, and is now north of 30%. This probably share expansion probably won’t continue. Uber had a public mishaps during that four year stretch that allowed Lyft to rapidly gain share. This mishaps likely won’t repeat itself. As such, Lyft’s market share will likely settle around 35% scale. On a 200 million rider base, that implies 70 million riders by 2030.
- Those 70 million riders could account for nearly 6 billion rides a year. The average American takes about four car trips every day, or 1,460 per year. Exiting 2018, the average Lyft rider was on track to do about 40 rides per year, and that’s up big from just over 30 at the end of 2016. This number should keep rising as consumers more heavily use ride-sharing services for everyday transportation. As such, that number could easily climb towards and above 80 by 2030, implying that 70 million riders could account for over 5.6 billion rides, and maybe closer towards 6 billion rides.
- Booking could be nearly $100 billion by 2030, while revenues could be north of $30 billion. Bookings per ride in 2016 was under $12. Since, it’s grown at a mid single digit annual pace to $13 today. This number should keep growing, thanks to inflation and stronger demand. Consequently, $16-17 in bookings per ride seems very doable by 2030, implying bookings of $90 billion to $100 billion. Assuming Lyft’s take rate grows gradually to 35%, that implies revenues north of $30 billion.
- Lyft could hit net profits of $4 billion by 2030. Contribution margin exited 2018 above 45%, and management expects this rate to expand over time with scale. Meanwhile, the opex rate is dropping rapidly, and should continue to do so next to big revenue growth. Thus, by 2030, a 55% contribution margin and 40% opex rate feel about right. That implies a 15% operating margin, which after a 20% tax rate and on $30 billion-plus in revenues, should produce around $4 billion in net profits.
- Lyft is worth $30 billion today. Based on a growth average 20 forward multiple, Lyft’s valuation by 2029 could measure out to $80 billion. Discounted back by 10% per year, that equates to a fiscal 2019 valuation target of $30 billion.
Bottom Line on LYFT Stock
Don’t be fooled. While many are calling the Lyft IPO over-hyped and LYFT stock overvalued, the core fundamentals underlying this company are very healthy. Several billions of dollars in profits are achievable within the next decade, and because of that, today’s $20 billion valuation for LYFT seems like a steal.
As of this writing, Luke Lango was long AMZN and TGT, and may initiate a long in LYFT within the next 72 hours.