Description

Warning: This might be the most terrible writeup out there, and there are tons of confirmation bias, but I just can’t help myself to write this up. To summarize below, Uber is not as strong as market thinks, Lyft is not as weak a #2 as market thinks, it’s quite unlikely there’ll be a #3 for a while with the easy money era ending. Lyft is still a big name in the space and with new CEO changing things up, could be better than market anticipates in the next two years. I’m not going to pretend to know what I don’t know. There’s very little valuation basis on this one.

Admittedly this is more on the speculative side of things, but I think LYFT is worth writing about given how terrible the stock has been, consensus sellside that just cannot see any path to success, generally extrapolating recent bad trends and a few recent developments that I think could drive the fundamentals and the stock. This is definitely not a strong company, or a "compounder", so if this is not your piece of cake, feel free to skip reading this. Warren Buffett wouldn’t touch this thing. In fact, it seems like no one will these days which makes the situation interesting.

The more I write, the more I think Lyft is a terrible company with terrible (ex)management, and maybe that’s the point here? All the bad things about Lyft have been written before and I think they might be right. Low founder ownership, aggressive adjusted accounting, overpaying executives as if SBC is free, cutting prices, Uber winning, etc. Paying incoming CFO $16M in stock (worth far less today of course) before she did anything seems too generous plus this: “Ms. Paul receives reasonable expense assistance for commuting and corporate housing in the San Francisco Bay Area of up to a pre-tax maximum of $200,000 per year in the aggregate. We believe providing this benefit to Ms. Paul was important for recruiting her to our company from outside the San Francisco Bay Area.”  Like seriously? These guys seem to think stock is free and expenses don’t matter. They have lost $10B since founding.

Enough warning of how terrible the company is. I think the set up and current events are interesting enough to warrant a short write up. Take everything you read here with a grain of salt though. A lot of opinions and hunches here, I acknowledge - and many things that I just cannot prove with facts and hard numbers. I cannot pretend to know what numbers Lyft will do the next 2 years, but the odds might not be too bad from here. At least at some point the next 2 years?

Business Model

Lyft is basically a ride sharing duopoly with Uber and has been written up a few times on VIC. Please read through the writeups and comments for more background. Below are a few new developments that I think could make the stock an interesting one from now.

New Management

New CEO David Risher took over from co-founders Logan Green and John Zimmer a few weeks ago (he started April 17, 2023). Risher had built Microsoft Access (its first Database product) from scratch and Bill Gates was obviously upset when he left to join a then startup called Amazon. He was SVP of retail and grew Amazon from $15m to $4B with Bezos and has a page on Amazon that memorializes his contribution. https://www.amazon.com/b?node=23972674011&ref_=cs_fdm_447307-23972674011 He then launched a non-profit called Worldreader that has reached 21 million people all over the world using Kindles, cell-phones, and tablets. Either he is really that good or the Lyft folks want to use his credentials to pump up the stock.

In the letter announcing him taking over his CEO, he wrote this:

• From Microsoft, I learned how to compete. At the time, competition was the energy drink that drove Microsoft. I drank all the Gatorade.
• From Amazon, I learned how to obsess over customers. Everything starts there.
• At Worldreader, I learned how to do more with less. Nonprofits tackle some of the world’s largest problems. Successful ones figure out how to make limited resources go a very long way.

The first bullet obviously means Uber and the third one is the important one. He could well cut a lot of costs and it’s easier him doing it vs the co-founders (more on this below), and like other tech peers, with non-zero interest rates and free money no longer, it’s not time to hire SW engineers to twiddle their thumbs or walk their dogs.

Risher is 57 and has been on Lyft's board since July 2021. I believe it's fair to say he knows what he's getting himself into when he accepted this job. I just cannot imagine someone who's been so successful for so long take a low probability bet at this age unless he thinks there’s a decent chance of success and that the payoff will be huge. And that’s exactly how they structured his payoffs. He stands to make $1B if the stock really takes off. Obviously, fundamentals will drive stock price over the long run. I (want to) believe Risher knows his odds.

Stickier duopoly than market thinks

See below from Jefferies on market share for ride hailing. Lyft is definitely losing share and market naturally extrapolating a straight decline from here. Latest data shows that Lyft might be down to 26% in market share. But what’s also interesting about this chart (if it is right) is that these 2 held 99-100% of market share over the past 5 years, despite the easy money environment then for anyone to come in. So it’s a decent bet that these 2 will continue to be dominant in the foreseeable future, especially one where it’s hard to raise capital and make a case that you can topple the big 2. And ride-hailing isn’t sexy enough for VC money anymore. Ride hailing WAS generative AI, many years ago.

All out Price war unlikely

This is what Risher said in a memo to employees announcing the latest layoffs:

And we need to bring our costs down to deliver affordable rides, compelling earnings for drivers, and profitable growth. We intend to use these savings to invest in competitive pricing, faster pick-up times, and better driver earnings

Competitive pricing were the key words and market got worried about an all-out price war. Uber stock traded down on this news as a price war will hit Uber 3x more than Lyft since Uber’s current market share is 3x that of Lyft’s. Uber really doesn’t want a price war because it will hit them harder. You could make a case of Uber using a price war to drive Lyft out, and start printing money as a monopoly. But really? Wouldn’t it better to have a weak competitor like Lyft hanging around than risk having a genuine #2 that could challenge, and stay free of all anti-trust issues.

Lyft cannot afford a real price war either. With no more free money to raise (and pay out SBC), I believe what Lyft wants to do is just be more sustainable, remove unnecessary costs and get back to quicker growth. Risher has emphasized profitable multiple times at various interviews. And given how stable and dominant these two are, it really makes no sense to self-destroy each other and let a 3^rd competitor in. I take comfort in Dara (Uber CEO) and Risher’s track record and predict sensible, co-operative, and not destructive competition.

Uber's lead is more vulnerable than market thinks

Even at the peak of ridesharing madness, many doubted Uber’s network and competitive advantages. Afterall, many drivers drive for both and can easily swap between apps and turn to the one with higher incentives thrown at them. Same for riders. Most of us have both apps and check prices before deciding on one. I suspect the duopoly is so dominant because many of us do not want to spend the time checking the price on a 3^rd app and I also suspect it’s hard for many folks comparing 3 prices vs 2. Plus Google doesn’t show all rideshare apps on Google Maps (for whatever reason).

It’s then interesting to see how many analysts are saying Uber is going to be dominant and will be the only ridesharing company around. And that Lyft will fade away. The market does not expect Lyft to give it a fight. If you read this WSJ article (https://www.wsj.com/articles/uber-ceo-started-driving-for-uber-5bef5023) about how Uber fixed its driver app and started attracting drivers, you’ll realize these are really not tough moves for Lyft to replicate. If these are true secret recipes, would Uber be doing such a big PR article and boast about it? Probably not. I suspect most of these will be replicated by Lyft very quickly.

What happened was when the pandemic was over and everyone began coming out, there was a shortage of drivers (stimulus money, no need to work as hard and take on a 2^nd job, etc.) and ride sharing fares went sky high on limited supply. Uber initially wanted to spend $250M on driver bonuses and Dara got hammered by investors. They then decided to fix the driver app (and it doesn’t take 227 slides to realize such a basic thing should be done). And it seemed to work. As more drivers opted for Uber, wait times for Lyft became worse, and naturally they lost share. Also Lyft’s stronger markets (West Coast) seemed to be recovering much slower. This is a good read too https://stratechery.com/2023/lyfts-founders-exit-uber-driver-improvements-wrong-about-aggregation/

And now everyone is expecting Uber to take over ridesharing and expecting Lyft to not recover.

We all know Uber is stronger than Lyft, Uber more dominant, but very simplistically (ignoring balance sheet strength, ability to raise capital, etc.) is Uber at $65B market cap 17x stronger than Lyft ($3.9B). Quoting Charlie Munger’s art of stock picking: Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on.But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2.Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.

Basically, I don’t think Lyft is 1/17^th the strength of Uber, despite it being in a so-so position. Some positive (unexpected) catalysts could drive Lyft stock the next 2 years. I don’t know what.

Lyft Growth will be better than consensus

In earnings calls, if we believe them, management did mention West Coast is only 60-65% recovered vs Q4 2019 levels and Lyft is over-indexed in the West Coast. Obviously as more people go back to in-person work, come out more, it is going to benefit them. Moreover, mgmt mentioned supply being a big issue in the West Coast, which I would infer meaning still elevated fares and lowering demand. It’s likely they will take Uber’s playbook above and start pushing growth in their stronger markets. Market is just looking nationally and ignoring the fact that the local battles are where the fights happen and Lyft’s stronger markets are simply not back to pre-covid levels yet, and hence the worst growth. Lyft is also over-indexed to shared rides historically and obviously that’s taking time to recover post-covid as the uneasiness of sharing rides still pervades. In fact, Uber just relaunched shared rides in June 2022 and Lyft was making shared rides more broadly last year.

Cost cutting will go further than we expect and Lyft will last longer than market thinks

When money is harder to come by, you realize you can do a lot more with less. Musk firing 80% at Twitter is the best example and I think more of the same will happen. I’ve got friends working in tech doing 2, even 3 full time jobs in SW and still barely work 40h. It’s clear more can and will be cut. Lyft cut more than 1000 employees (out of 4000) in late April and had already cut almost ~700 last year. Risher said no more cutting, but more could come. His nonprofit experience should help. They have $1.8B in cash and $800M in debt (not including op leases). They had $200M in SBC in 2022 Q4 and op cash flow was -34M. Assuming they can slash $100M in SBC and $100M is left as real comp (seriously if you cannot slash SBC with the company facing extinction, when can you), and they burn $150m each q, liquidity shouldn’t be a big deal for the next 2 years. He asked everyone go back to office 3-4 days/week the day after announcing the 1000 person cut.

Bloodbath to set up new CEO for "success"

It’s well known that Lyft plays adjusted #s aggressively. See below from Jefferies.

Before announcing Risher as CEO, they took the typical bloodbath accounting. Were they setting him up for “success”?

Valuation

GAAP EBIT averages -32% the last 6 quarters. How do you value this thing? I don’t know if it’s really possible. And that’s the point, suddenly no one knows how to value this thing. Maybe no one ever knew in the past. Not going to give you an EV/Rev, EV/Gross Margin multiple vs historicals, “peers” and make you think this thing is “cheap”.

Consensus has this thing growing 9% and 13% this year and next, and I believe it could be better and that Uber’s share gains could be stopped (even reversed) as what they had done can be replicated by Lyft. High short interest doesn’t hurt either.

Risks

Obviously, this is a highly speculative writeup with the company burning cash for so long and losing share like there’s no end in sight. It could well be worth zero. You won’t sleep well at night owning this. I wouldn’t make this a big part of your net worth. It might be the case that the “raise more money”, pay executives highly with SBC, low efficient culture is unfixable even by Risher.

This is essentially a bet on Risher doing a better job the next 2 years than the market expects. I don’t know a ton, and this is essentially the thesis.

Catalyst

Steeper cost reduction than expected

Lyft posting top line better than consensus and showing signs it’s not losing share anymore.

Signs that it could lose money less than anticipated