Dream Big Or Stay Focused? Lyft’s Counter To Uber! by Aswath Damodaran, Musings On Markets
This is the second in a series of three posts on the ride sharing business. In my first, published in both TechCrunch and my blog, I valued Uber, trying to incorporate the news that has come out about the company and its competition in the last year. In this one, I first turn to valuing Lyft, which is telling a narrower, more focused story to investors than Uber and also look at how the pricing ladder in ride sharing companies has pushed up prices across the board. In the last post, due out on Wednesday, I will look at the ride sharing market as a business.
In my last post, I valued Uber and admitted that the company has made its way to my list of obsessions. My focus on Uber, though, has meant that I have not paid any attention to the other ride sharing company in the US, Lyft, and I don’t think I have been alone in this process. An unscientific analysis of news stories on ride-sharing companies in the last couple of years suggests that Uber has dominated the coverage of this business. Rather than view this as a slight on Lyft, I would argue that this is at least partially by design, and that it is part of both companies’ strategies. Uber is viewed as the hands-down winner of this battle right now, but this is just one battle in a long war and investors define winners differently from corporate strategists.
To value Lyft, I will employ the same template that I used for Uber, though the choices I will make in terms of total market, market share, operating margins and risk will all be different, reflecting both Lyft’s smaller scale and more limited ambitions (for the moment).
The Leaked Numbers
The place to start this assessment is by comparing the ride sharing reach of Lyft with Uber and that comparison is in the table below:
|Number of cities in US||150||65|
|Number of cities||>300||65|
|Number of countries||60||1|
|Number of rides – 2014||140||NA|
|Number of rides (in millions) – 2015E||NA||90|
|Number of rides (in millions) – 2016E||NA||205|
|Gross Billings (in millions $) – 2014||$2,000||$500|
|Gross Billings (in millions $) – 2015E||$10,840||$1,200|
|Gross Billings (in millions $) – 2016||$26,000||$2,700|
|Estimated Growth for 2015||442%||140%|
|Estimated Growth for 2016||140%||125%|
|Operating loss in 2014 (in millions $)||-$470||-$50|
The key differences can be summarized as follows. First, Uber is clearly going after the global market, uninterested in forming alliances or partnerships with local ride sharing companies. Lyft has made explicit its intention to operate in the US, at least for the moment, and that seems to have been precursor to forming alliances (as evidenced by this news story from two weeks ago) with large ride sharing companies in other markets. Within the US, Uber operates in more than twice as many cities as Lyft does. Second, both companies are growing, though Uber is growing at a faster rate than Lyft, and that is captured in both the number of rides and gross billings at the companies. Third, both companies are losing money and significant amounts at that, as they go for higher revenues. Note that, for both companies, the bulk of the information comes from leaked documents, and should therefore considered with skepticism. In addition, there are some numbers that come from press reports (Lyft’s loss in 2014) that are more guesses than estimates.
The business models of the two companies, at least when it comes to ride sharing, are very similar. Neither owns the cars that are driven under their names and both claim that the drivers are independent contractors. Both companies use the 80:20 split for ride receipts, with 80% staying with the driver and 20% going to the company, but that surface agreement hides the cut throat competition under the surface for both drivers and riders. Both companies offer incentives (think of them as sign-up bonuses) for drivers to start driving for them or, better still, to switch from the other company. They also offer riders discounts, free rides or other incentives to try them or, better still, to switch from the other ride sharing company. At times, both companies have been accused of stepping over the line in trying to get ahead in this game, and Uber’s higher profile and reputation for ruthlessness has made it the more commonly named culprit.
The other big operating difference is that unlike Uber, which is attempting to expand its sharing model into the delivery and moving markets, Lyft, at least for the moment, has stayed much more focused on the ride sharing business, and within that business, it has also been less ambitious in expanding its offerings to new cities and new types of car services than Uber.
The Narrative Contrast and Valuation
In my valuation of Lyft, I will try to incorporate the differences that I see (from Uber) into my narrative:
|Potential Market||US-centric, ride-sharing company.||Global, logistics company|
|Growth Effect||Double ride-sharing market in US in next 10 years||Double logistics market globally in next 10 years|
|Market Share||Weak national networking benefits||Weak global networking benefits|
|Competitive Advantage||Semi-strong competitive advantages||Semi-strong competitive advantages|
|Expense Profile||Drivers as partial employee||Drivers as partial employees|
|Capital Intensity||Low capital intensity||Low capital intensity, with potential for shift to more capital intense model|
|Management Culture||Aggressive within ride sharing business, Milder with regulators and media.||Aggressive with all players (competitors, regulators, media)|
In short, the Lyft narrative is narrower and more focused (on ride sharing and in the US) than the Uber narrative. That puts them at a disadvantage, at least at this stage in the ride sharing market, in terms of both value and pricing, but it could work in their favor as the game unfolds.
The adjustments to the Lyft valuation, relative to my Uber valuation, are primarily in the total market numbers, but I do make minor adjustments to the other inputs as well.
- Smaller total market: Rather than use the total global market, as I did for Uber, I focus on just the US portion of these markets. That reduces the total market size substantially. In addition, I assume that, given Lyft’s focus on ride sharing, that its market is constrained to be the US car service market. Notwithstanding these changes in my assumption, the potential market still remains a large one, with my estimate about $150 billion in 2025.
- National networking benefits: Within the US market, I assume that the increased cost of entry into the business that I referenced in my last post on Uber will restrict new competitors and that Lyft will enjoy networking benefits across the country, enabling it to claim a 25% market share of the US market.
- Drivers become partial employees: My assumptions on drivers becoming partial employees and competition driving down the ride sharing company slice of revenues will parallel the ones that I made for Uber, resulting in lower operating margins (25% in steady state) and a smaller slice of revenues (15%).
- Lyft is riskier than Uber: Finally, I will assume that Lyft is riskier than Uber, given its smaller size and lower cash reserves, and set its cost of capital at 12%, in the 90th percentile of US companies, and allow for 10% chance that the company will not make it.
The value that I derive for Lyft with these assumptions is captured in the