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Lyft vs Uber: David vs. Goliath battle plays out in 2018

By Rohit Kulkarni, SharesPost

Everyone loves a David vs. Goliath story. The ancient tale has become a symbol of how smaller competitors can defeat larger ones using intelligence and determination. History is full of upstarts who slug it out with industry giants and win: Facebook vs. MySpace, Google vs. Yahoo, Apple vs. IBM, and so on.

In the shadows of Uber’s ongoing miseries, Lyft has had a very good run in the past 12 months. The company just closed an expanded $1.5 billion funding round, while Uber continues to stumble around the SoftBank-led $10 billion tender offer. Lyft continues to build its management bench strength with key hires, while Uber is still looking for a CFO, CMO and a COO, among other executives. With wind in its sails, Lyft clearly has the momentum to pass Uber.

Rohit Kulkarni, SharesPostm approved 12-17
Rohit Kulkarni

But investors have plenty of reasons to be cautious, too. For Lyft investors there are three key questions:

  1. Can Lyft vs. Uber have a similar ending as David vs. Goliath?
  2. If Lyft goes public, how would investors value it?
  3. Despite such a positive backdrop, what can go wrong for Lyft?

To answer these questions, we surveyed more than 6,000 American adult smartphone users about their ridesharing preferences. We also signed up as a Lyft driver and drove around the San Francisco Bay Area. We even compared hundreds of routes and fares between Uber and Lyft in more than 10 U.S. cities.

Why be bullish about Lyft?

There are three reasons why Lyft is attractive investment, in our view.

  • Lyft is riding a double-double wave right now. Ridesharing adoption is growing and Lyft’s U.S. market share is rising. Our second annual ridesharing survey found that more consumers are using ridesharing today. Fifty-three percent of consumers surveyed have used one or more ridesharing app in past 12 months. This is a clear increase compared to the 38 percent of survey respondents in our 2016 survey. That’s also up from the 20 percent penetration rate documented in a Pew survey in late 2015. Also, a greater proportion of consumers are opting for Lyft as their first ridesharing app instead of Uber. The preference for Lyft has increased from 10 percent to 18 percent within the last 12 months.
  • Lyft benefits from a second-mover advantage. As a relative latecomer in the ridesharing market, Lyft benefits from certain advantages, including the “free-rider effect.” Whereas Uber bore the effort and expense of establishing a new category and building consumer awareness, Lyft doesn’t have that burden. It can focus more time and resources on marketing its specific brand. Similarly, Uber also bore much of the responsibility of establishing a legal framework for ridesharing applications, often taking on greater risk to operate in legally tenuous circumstances. In these and other areas, Lyft directly or indirectly benefits from the pioneering efforts of Uber, while bearing little or none of the risks or incremental costs.
  • Lyft riders are more satisfied. They use ridesharing more frequently and spend more money than Uber riders. Per our survey, Lyft riders on average use the service about once a week (or 50 times per year), whereas Uber riders use the service about 40 times per year. A typical Lyft user spends about $17.90 per ride, while an Uber user spends about $15.75 per ride. We’d note that our 2017 survey included roughly 630 Lyft users and 2,300 Uber users. In 2016, our survey included 200 Lyft and 1,540 Uber users.

These positive trends are in addition to a large and growing market opportunity for ridesharing apps, and secular tailwinds, such as smartphone adoption, millennial behavior, and data growth and cloud computing. We’re also optimistic about Lyft’s execution and track record to date.

If Lyft goes public, how would investors value it?

If Lyft pursues an IPO, public investors will calculate the company’s enterprise value based on a blended average of 2019 and 2020 financial estimates. We realize there are a lot of “ifs” in this scenario.

However, based on publicly available information and the application of reasonable growth rates to Lyft’s underlying metrics, Lyft’s 2019 revenues could exceed $3.5 billion, and 2020 revenues could exceed $4.5 billion, according to our base-case analysis. We think public equity investors would assign a combination of 4.0x and 5.0x EV/revenue multiples on these projections.

Our base scenario leads us to believe that Lyft could be valued at about a $17.8 billion market cap at the end of 2019. One caveat: Investors would expect Lyft to show a clear pathway to profitability. If Lyft is unable to demonstrate that it can deliver positive EBITDA in three years (by 2020), then the revenue multiple, and hence the implied valuation, would be lower.

What can go wrong for Lyft?

  • Uber still has a dominant market share, and competition is more intense outside the U.S. Despite recently revealed plans to expand into Canada, Lyft currently operates exclusively in the U.S. Thus, Lyft’s expansion strategy to date has essentially consisted of following Uber from city to city, increasing coverage in U.S. population centers, and partnering with other ridesharing companies to provide Lyft users with seamless service internationally. While this strategy has enabled Lyft to double down in the U.S. and claim substantial market share from Uber, it remains to be seen how the company will handle international expansion. In addition to the inherent risks and costs associated with any expansion into new markets, international expansion will translate into increased regulatory uncertainty, a new competitive environment and diverse consumer preferences.
  • Price competition and price sensitivity are high in the ridesharing market. Over the past few years, ridesharing companies have engaged in fierce price warfare at all levels, including driver subsidies and rider promotions. This downward pricing pressure eats into take rates and could also affect the company’s long-term profitability outlook. We compared Lyft and Uber fares for five of the most popular routes in 20 of the most desirable ridesharing markets/cities across the U.S. We observed fairly minimal difference between the two for 40 percent for our searches, but Lyft appears to be winning the price war in a marginally greater proportion in the remaining cities.
  • Lyft’s cost structure at scale remains unproven. The long-term cost structure and unit economics of ridesharing companies remain unproven and debatable. We are encouraged by recent reports indicating that Lyft’s operating losses in 2017 could remain unchanged from 2016 levels despite exponential revenue growth. However, Lyft’s pathway to profitability might hit speed bumps due to international expansion plans, coupled with ongoing marketing spend ramp (e.g. ad campaign featuring Jeff Bridges as brand ambassador).

Rohit Kulkarni is a managing director and head of research at SharesPost Inc.

Action Item: To see a 55-page report entitled “Lyft: Closing the Gap on Uber” is available from SharesPost at http://bit.ly/2DqW6sO

Photo of a car windshield with Uber and Lyft signs in Santa Monica, California. Reuters/Lucy Nicholson