Path to Profitability: One Size Does Not Fit All

Path to Profitability: One Size Does Not Fit All

Lyft shares are down 5% in the aftermarket, reflecting investors’ disappointment that the company’s track to profitability will be a full year behind Uber’s Dec-20 target. This reaction captures current investor group-think that all companies must meet profitability as fast as possible. We believe Lyft is making the right decision to continue to invest in growth at the cost of near-term profitability, given ridesharing in the US is still nascent. We believe Lyft will grow US revenue at around 30% in the current quarter compared to Uber’s US revenue growth, which we estimate will be about 15% in March.

Other Takeaways:

  • For Q1, Lyft guided revenue essentially in line with the Street and adjusted EBITDA fractionally better than expectations.
  • As mentioned, what surprised investors was commentary related to the track to profitability, which Lyft expects to reach in Dec-21, a few quarters later than investors had hoped. This is only a fractional negative and is essentially the same as Uber’s expectations (a quarter or two over a 10-year trend is not significant).
  • Lyft’s growth in revenue, active riders, and revenue per rider all decelerated, but still remain above 23%+, which is respectable. We expect overall growth to stabilize in the 15%-20% range in the next two years.
  • The e-bike category is underappreciated by investors, and Lyft reiterates that unit economics are turning favorable for that segment. While immaterial to revenue today, it’s a positive in the company’s hunt for profitability.
  • Because rideshare is a commodity service, Lyft and Uber highlight partnerships with airlines, hotels, credit cards, hospitals, etc. to drive loyalty and repeat use. Expect the land grab for partners to continue, as it effectively acts as sales and marketing spend.
  • Note that Lyft will likely grow revenue in Q1 2020 at 37% vs Uber at 29%. We believe the US ridesharing market is still in the early innings. Adjusting for those under the age of 16, we estimate only 13% of the population actively uses ridesharing, so it’s the right long-term strategy for Lyft to invest in the business in 2021 at the cost of profit.
  • Lyft avoided the question about future price increases but left the door open. This is a duopoly in the US. We believe Lyft and Uber’s prices will follow each other, likely increasing ~10% per year for the next several years.
  • An underappreciated aspect of Lyft’s approach is the company’s culture, which puts a greater emphasis on drivers and cost savings.