Uber’s competitive rival, Lyft is beating the firm in the race to the competitive markets and is on the fast track to become the first publicly listed car booking company.
I personally have not used the Lyft service myself, as I usually opt for Uber when I’m away on a trip. I think downloading a whole new app and setting up a new account seems pointless when Uber provides the same service, just sounds like a hassle. However, even I can see the potential which Lyft has to become a household name like Uber (especially at a time where Uber’s reputation has taken multiple hits due to the treatment of their employees).
Lyft was last valued at $14.5 billion and has raised an astronomical amount of $85 billion from private funding over the past few years. Now, with over 31 million riders and revenues of $2.2 billion the company is pitching the biggest technology listing in the US in over 2 years. The firm is aiming to sell around 31 million shares in order to raise $2 billion capital.
With both its revenue and market share on the rise at 39%, it could be said that the future looks bright. However, by taking a thorough look into the firm’s finances, this outcome can be called into question. Like its rival, the business is ‘burning’ through cash in order to fund its expansion. The business made a net loss of $911.3 million in 2018 as costs increased by 77% that year with a large portion of those funds being spent for research and marketing purposes. With this in mind, I think it is clear that the business is investing its funds into maximising shareholder wealth but is this possible if Lyft continue to make such big losses?
It seems as though Lyft simply cannot afford to stop growing. Despite the losses, Lyft CEOs Green and Zimmer are attracting investors with their focus and pace of expansion. Their vision focuses on reducing traffic congestion and pollution with the aim of reducing car ownership. But can a car company who aims to have more drivers on the road, really drive down the number of those who own cars, I personally view this as a conflict in interest and don’t see how this would be possible.
Nevertheless, many investors evidently seem to think this is a possibility especially with the business valuation at approximately $23 billion, (this is regardless of the losses which the business has incurred each year). It is interesting to look at the sources of capital used by the business (Lyft’s capital structure) as the business was previously funded by private capital and is now looking at public funding with its IPOs. Modligiani and Miller argued in 1958 that the companies value depended purely on basic risk but with the high debt and equity levels in Lyft alongside the added risk due to this, it could be said that the valuation should be much lower to take in to account the high risk.
In addition to this, I think the fact that investors have continued to invest in Lyft and now the public interest in their shares shows the confidence which they have that Lyft will be able to payback their debt and begin to make a profit.
As the levels of debt and equity increase, the WACC then decreases. The optimal capital structure would be where there is a low WACC with a positive high-performance spread. As the debt/equity continues to increase the WACC will then start to increase again and this is the point where the business is likely to incur financial distress costs such as shareholders demanding higher returns and uncertainty among suppliers and customers. I don’t think Lyft is at that point yet as there is clearly market confidence in Lyft’s IPO and in the business generally. This is clearly evident with the large amounts of capital pumped through Lyft. Only time will tell whether or not the investment will pay off.
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