March 29,2019, Lyft shares rose 8.7% on its first day of trading. It’s a long-awaited chance for investors to grab the opportunity of the biggest and most high-profile technology IPO since Snap debut in 2017.

Lyft opened at USD 87.24 on the first day, up 21%. The opening price pushed Lyft a valuation of roughly USD 30 billion on a fully diluted basis. Lyft is offering 32.5 million shares of its Class A common stock, plus up to an additional 4.8 million shares that the underwriters have the option to purchase. Lyft priced its IPO at USD 72 a share late Thursday to raise USD 2.3 billion publicly.

The company went through a tough time when its largest rival Uber trying to cut off its capital resource from private equity or venture capital firms, reported by Wall Street Journal. Lyft’s performance has boded well for Uber, however, which will kick off its IPO in April.

But how far ride-hailing companies can turn to the inflection of profitability? And what’s the subsequent lesson for Didi? We dive deeply into Lyft’s financials and its true motivation behind the IPO to find the answers.

Business Model

Lyft is making money by charging service fees and commissions for each ride the company offer to its riders and drivers.

The company uses contribution margin as one of non-GAAP metrics to give us a breakout of how its business operates. Contribution margin has been increasing from 2016 to 2018, from 23.1% in the first quarter of 2016 to 45.5% in the fourth quarter of 2018. The company almost double Contribution margin to USD 920 million last year than that of 2017.

Cost of revenue was USD 1.24 billion on USD 2.2 billion sales in 2018. The company generated minus USD 977 million operation loss last year. To conclusion, even it has a good growth story, for instance, its revenues increased over 100% last year but still struggles to find the path to positive operation profit, not even mention the net profit.

Lyft is no longer on its early stage when it put up about USD 343 million revenues in 2016. When we look at its core business metrics for a company which still cannot make money, we can see an unviable business model from that.

The company has 18.6 million active riders in 2018 Q4. The number of revenues per active riders is increasing in the past three years and recorded at USD 36.04 in 2018 Q4. Both of the numbers reflect the company has a healthy business growth.

That’s the user sides. With respect of drivers side, the company came up with a concept called a cohort of riders which is defined as riders who took their first Ride on its platform through the Lyft app in a specific year. The 2015 cohort, which is the earliest drivers (in the reported period) of that platform drive 67 million rides in 2018.

The company also have seen that the aggregate number of rides taken generally increase as riders in each cohort derive more utility out of the platform and expand their use cases.

The company expects an increased frequency of use of its multimodal platform as it innovates and expands offerings, which is the core role of an as-a-service player. However, Lyft is exploring scooter business so far, ignoring food delivery or logistics.

Lyft lost USD 911 million in 2018, growing by 32.5% from last year. Lyft recorded contribution per ride at USD 1.49, growing from USD 0.5 in 2015. But the problem is the net loss per ride was minus USD 1.47, which addresses the need to increase contribution per ride at a rapid speed to offset growing operating expenses.

Prisoner’s Dilemma

Lyft has an ability to chip away at Uber’s dominance in recent years, especially in the aspect of fundraising and the business strategy. The company has upped its U.S. market share from 15% to around 30% over the three years, according to Second Measure, reported by Wall Street Journal. Uber has roughly 70% of the market.

Lyft itself estimated that it has about 39% of the U.S market in Dec 2018, up from 22% in 2016, which is an impressive development since the U.S is also Uber’s major operation locations.

Lyft has been pitching its simplicity to its investors in its roadshow. John Zimmer, the company’s co-founder said that "we are founder-led. We have one of the largest and fastest-growing multimodal transportation networks. We are solely focused on consumer transportation. Not food. Not trucking. We have a strong brand based on our strong values. And we have the right autonomous strategy," CNBC reported.

Lyft has exhibited in its roadshow that the industry was ripe for a “natural monopoly” in which a company could “set price to maximize profits”.

However, it is never a natural monopoly situation either for Lyft or Uber yet. Uber and Lyft have somehow been trapped in a classic prisoner’s dilemma. Given ride-hailing companies’ primary competition model, they must keep subsidizing drivers and riders to seize market share. If one of them stopped that, it can make money but will soon definitely face failure. 

We give out the matrix under the game theory as below:

The equilibrium result lies in the (High, High), which leads to that both parties are constantly burning money to compete with each other and fearing they will lose market shares. Usually, under such scenarios, the party who take more money with it will win the game at last.

However, as Uber has marred its brand due to PR disasters happened in earlier 2017 which led to its then CEO’s resign, Lyft was able to grow by leveraging that chance and successfully raised USD 600 million to seize the market share at that time.

Uber has made plenty of mistakes in terms of corporate culture and Lyft ultimately established itself as more of an ethical company.

As the market adjusted itself to be stable, the two companies are back to the duopoly situation. They are still losing money for each ride and they still cannot earn profits as long as they do not want to see their market being eaten.

Cautions: Didi is going through a similar problem

Lyft & Uber Dilemma

Didi needs to caution that for a similar thing is happening in China where the company maintains a more than 90% of market share. After two riders have been killed by drivers on its platform, Didi suspended its ride-Hitch service indefinitely last August.

Even rumors said that the company planned to reopen that business in April, Didi never responded to it officially to date. Didi became prudent when it comes to safety and regulations. The company postponed its IPO plan as well.

A number of competitors, however, are exploiting this precious opportunity to build its own brand and outrank Didi, at least, in a niche market.

Didi has a series of competitors before the safety issue actually, including UCAR-backed Shenzhou Zhuanche (神州专车), Shou Qi Group-backed Shou Qi Yueche (首汽约车)and Geely-backed Caocao Zhuanche (曹操专车), which operate in a business to customer (B2C) model. These companies own or rent all the vehicles used in their service and train their drivers and give certificates to them, who will be treated as their employees and enjoy monthly payments.

It’s a heavy-asset way to do ride-hailing business and has nothing to do with ride-sharing or sharing economy. However, B2C model allows companies to increase user stickiness by offering a standardized and high-quality service, and more importantly, it is less exposed to regulation risk compared to C2C (Customer to Customer) model.

As for the C2C model, new competitors are emerging recently. Startup Hello Chuxing decided to expand its bike-sharing business to include a hitch service called Hello Hitch (哈啰顺风车) last December. It only charges 5% from the gross bookings as its revenues, compared to then didi’s Hitch service charging from 10% to 15% before Didi cut the service down last August. Hello Hitch touted it pursues sustainable cash flow other than heavy profits.

Valuation

Didi has completed 7.43 billion rides in 2017, a staggering number which is around 20 times than that of Lyft. Considering the two companies have different subsidies policy, commission fee and service fee, insurance policy, and even different average price per ride in the two countries, it’s hard to extrapolate the exact valuation of Didi by simply looking at these business metrics.

Of the two companies, Didi’s dominance in its domestic market means it losses more money. The company reported a loss of CNY 10.9 billion (USD 1.6 billion) last year and its closest competitor Uber recorded USD 1.8 billion loss at the same period.

Uber and Didi have a similar business strategy. Both companies venture into costly businesses, including food delivery and bicycle-sharing, as well as international expansion efforts like in Brazil and Mexico, which will eat into their cash quickly.

Uber is preparing to file for their initial public offerings scheduled for as early as next month. However, Didi faces a government crackdown and public backlash and remains low-profile for more than half of year. The firm even released its net loss numbers to the public to alleviate pressure burden, Chinese media suspected.

The 2018 IPO market was extremely receptive to money-losing firms. According to data from University of Florida professor Jay Ritter, over 80% of companies that went public in 2018 were unprofitable, Business Insider reports.

We expect that given Didi’s such large scale, it is reasonable that Didi's market cap will surpass the lasted post-money valuation of USD 56 billion when it goes IPO.

Even if that happens, we still doubt how long people will keep buying it shares until the company will finally get to a point where it will reach profitability. But the company will have a hard time until that point.

Path to profitability

Uber and Lyft are somehow in a duopoly situation on the rideshare market and that leads to a key question: when they can make a profit?

Lyft gave its answer towards costs and future. Lyft executives said they expect the costs of processing transactions to come down, according to Reuters.

Lyft now has 18.6 million active riders and over 1.1 million drivers who provide rides for Q4 2018. On the road head, Lyft believes that their business has a potentiality to grow in the future as just 1% of miles traveled in the U.S. happen on rideshare networks, according to McKinsey.

Considering some people would still want their own, we still think the market has a massive opportunity to serve more people even it is not 100%. Things are similar in China.

The ride-hailing penetration rate in China is 18.2% in 2017 and expected to grow to 22.4% in 2020, according to data collected by Statisita.

Investors partly were driven by Lyft’s autonomous driving story to buy its shares. The company says that it ultimately wants to oversee a fleet of tens of millions of autonomous vehicles.

For now, ride-hailing is a service or commodity sending people from location A to location B. Suppliers has little bargaining power and pricing power. If Lyft can cut the cost of rides by leveraging autonomous driving technology, pricing power would no longer exist as a problem anymore.

However, we have not a clue about what process the company has developed its technology so far. We did not see its road testing report in California in 2018 for it did not operate vehicles here. Waymo, a subsidiary of tech giant Google which has a way more cash balance than that of Lyft, reported the best transcript in that race.

Didi joined a number of tech giants, including internet behemoth Google and Baidu, and Uber in a race to develop autonomous driving for public transport. The company has launched road testing in four cities in China and America, which the company did not elaborate on the exact places. Didi has acquired a license from California DMV to launch live trials of autonomous vehicles in May 2018, trying to catch up with its peers.

We are pretty much suspicious about how much percentage of revenue Lyft can invest in the autonomous driving business as its cost is growing as fast as revenues, as well as when it comes to Didi and Uber.