I got to watch Lyft IPO on the Nasdaq Friday, as I was flying back home to Portland from spring break in Phoenix with my family. It was fun to watch, and since that was basically all that CNBC (only financial channel available on Southwest Airlines – boo!) was covering, I got to take it all in. Lyft started trading at $87.24, went as high as $88.60, and closed the day at $78.29. But is Lyft a good investment?
This analysis is based solely on the information that Lyft filed with the SEC. They amended their prospectus (Form S-1) several times to increase the number of shares offered, finally settling on 30,770,000 shares. After the offering, the total float is 271,367,591 shares. The underwriter has an option available to buy an additional 4,615,500 shares under this prospectus (which would bump the float to 275,983,091), but for the sake of simplicity I will assume this option is not exercised. I would like to note that despite some CNBC commentators stating that Lyft’s drivers are contractors and thus not participants in the IPO, Lyft actually did make shares available to drives who had completed 10,000 rides on the Lyft platform, and drivers who serve or served on, their Driver Advisory Council.
Using Friday’s $78.29 close, Lyft’s market capitalization is $21,245,368,699 or $21.25 billion. Lyft’s sales in 2018 were $2.16 billion, meaning that at Friday’s close Lyft was selling for 10 times sales. Google goes for about 6 times sales. Investors are willing to pay more for Lyft’s sales because the company is growing sales faster than older companies, like Google. From 2017 to 2018 Lyft grew sales over 100%, from $1.06 billion to $2.16 billion. Google, who went public 15 years ago, only grows sales at a little over 20%. If Lyft is able to generate $4.31 billion in sales this year, the stock should go for around $158 a share, assuming a similar valuation of 10 times sales. Were Lyft’s growth to cool this year, say to something like 65% growth, I could see shares going for about $78 next year, which is 6 times sales (Google makes money, Lyft does not).
The other side of that story though, is how Lyft is paying for their sales growth. In 2017 they spent $1.77 billion to generate $1.06 billion in sales and last year the company spent $3.13 billion to generate the $2.16 billion in sales. Definitely moving in the right direction (as a percentage of revenue) but still a big number. Digging into the numbers, R&D was 13% of sales in 2017 and 14% in 2018. G&A held steady at 21% of sales, each year. Sales & Marketing dropped from 53% of sales in 2017 to 37% in 2018. It will be very interesting to compare these numbers against Uber, when their S-1 comes out. Does anybody think Uber only invests 14% of their revenue in R&D? I don’t.
The founders, Logan Green and John Zimmer, basically invented the ride sharing space as we know it today. Green started a car-sharing program while he was still in college at UC Santa Barbara, while Zimmer created his Facebook-based ride-sharing project while working at Lehman Brothers, in New York City. Here are two entrepreneurs – on opposite sides of the country – who had a similar idea and somehow came together and were able to work together and polish that idea into a billion dollar company. Who am I to question these guys over 100% sales growth?
The other is CFO Brian Roberts. He’s not normally the kind of guy I want to see in a CFO role, but in Lyft’s case I think he makes a lot of sense – in the same manner as Ned Segal at Twitter, btw. Roberts has a business development history, from his early days at investment banker Evercore, to helping create Walmart’s e-commerce business, he has experience in growth strategy and he has been very successful. I have a feeling, now that the IPO is over with, that Roberts will have an increasing role as the public face of Lyft.
I’m not convinced that Lyft can achieve another 100% sales-growth year. I’m a big fan of the leadership team and the business, but the current $78 stock price does not leave a lot of margin for error. Were Lyft to trade down into the sub-$50 range (a 40% selloff would not be uncommon for an IPO), I would certainly be looking to get onboard.