The Lyft Valuation

When valuing young companies, it is the story that drives your numbers and valuation, not historical data or current
financials. I have stayed true to this perspective, in all of the valuations that I have done on ride sharing companies.
In this section, I will lay out my story for Lyft, drawing on past behavior and the clues that are in their current plans,
but it would be hubris to argue that I have a monopoly on the truth and a claim on the "right" story. So, feel free to
disagree with me and you can use ​my valuation spreadsheet ​to reflect your disagreements.

The Story
Reviewing Lyft's (very long) prospectus, I was struck by the repetition of the mantra that it saw its future as a "US
transportation" company, suggesting that the focus will remain primarily domestic and focused on transportation.
While the cynical part of me argues that Lyft's use of the word "transportation" is intended to draw attention to the
size of that market, which is $1.2 trillion, Lyft's history backs up their "focused" story. While I am normally leery of
management stories for companies, I will adopt Lyft's story with a few changes:
1. It will stay a US transportation services company​: ​The total market that I assume for US transportation services
is $120 billion at the moment,​ well over two and a half times larger than the taxi cab market was in 2009. That is,
of course, well below the size of the transportation market, but the $1.2 trillion that Lyft provides for that market
includes what people spend on acquiring cars and does not reflect that they would pay for just transportation
services.
2. In a growing transportation services market​: One of the striking features of the ride sharing revolution is how
much it has changed consumer behavior, drawing people who would normally never have used car service into
its reach. I will assume that ride sharing will continue to draw new customers, from mass transit users to
self-drivers, ​causing the transportations services market to double over the next ten years.
3. With strong market-wide networking benefits​: In 2014, when I first valued Uber, I argued that ride sharing
companies would have local, but not market-wide, networking benefits. In effect, I saw a market where six, eight
or even ten ride sharing companies could co-exist, each dominating different local markets. Observing how
quickly the ride sharing companies have consolidated, over the last few years, I think that I was wrong and that
the networking effects are likely to be market-wide. Ultimately, I see only two or three ride sharing companies
dominating the US ride sharing market, in steady state. In my story, I see Lyft as one of the winners, with a ​40%
market share of the US transportation services market​.
4. A sustained share of Gross Billings​: The concentration of the market among two or three ride sharing companies
will also give them the power to hold the line on the percentage of gross billings. That percentage, which was
(arbitrarily) set at 20% of gross billings, when the ride sharing companies came into being, has morphed and
changed with the advent of pooled rides and how the gross billing number is computed. Lyft, for instance, in
2018, reported revenues of $2,156 million on gross billings of $8.054 million, working out to a 26.77% share. ​I
will assume that as Lyft continues to grow and offers new services, this number will revert back to 20%​.

5. And a shift to drivers as employees​: Since their inception, the ride sharing companies have been able to
maintain the facade that their drivers are independent contractors, not employees, thus providing the company
legal cover, when drivers were found to be at fault of everything from driving infractions to serious crimes, as well
as shelter from the expenses that the would ensue if drivers were treated as employees. As the number who
work for ride sharing companies rises into the millions, s​tates are already starting to push back​, and in my view, ​i​t
is only a matter of time before ride sharing companies are forced to deal with drivers as employees,​ causing
operating margins in steady state to drop to 15%​.
There are some aspects of this story that some of you may find too pessimistic, and other aspects that others may
find too optimistic. You are welcome to ​download the spreadsheet​ and make the story your own,

The Valuation
The story that I have for Lyft already provides the bulk of the inputs that I need to value the company. To complete
the valuation, I add four more inputs related to the company:

1. Cost of capital​: Rather than try to break down cost of capital into its constituent parts for a company that is
transitioning to being a public company, ​I will take a short cut and give Lyft the cost of capital of 9.97%, at the
75th percentile of all US companies at the start of 2019​, reflecting its status as a young, money-losing company.
I will assume that this cost of capital will drift down towards the median of 8.24% for all US companies as Lyft
becomes larger and profitable.
2. Sales to capital​: While Lyft will continue to operating with a low capital-intensity model, its need for reinvestment
will increase, to build competitive barriers to entry and to preserve market dominance. If autonomous cars
become part of the ride sharing landscape, these investment needs will become greater, ​I will assume revenues
of $2.50 for every dollar of capital invested, in keeping with what you would expect from a technology company.
3. Failure rate​: Given that Lyft continues to lose money, with no clear pathway to generating profits, and that it will
remain dependent on external capital providers to stay a going concern, ​I will assume that there is a 10% chance
that Lyft will not survive as a going concern​.
4. Share Count​: Lyft posits that it will have 240.6 million shares outstanding, including both the class A shares that
will be offered to the public and the class B shares, with higher voting rights, that will be held by the founders. It
also discloses that it did not include in the share count two share overhangs: (1) 6.8 million shares that are
subject to option exercise, with a strike price of $4.68, and (2) 31.6 million restricted shares that had already
been issued to employees, but have not vested yet. I will include both of these in shares outstanding, the options
because they are so deep in the money that they are effectively outstanding shares and the restricted stock
because I assume that the employees that have large numbers of RSUs will stay until vesting, ​to arrive at a total
share count is 279.03 million​.

Finally, the company has not made explicit how much cash it hopes to raise from the initial public offering, but I have
used the rumored value of $2 billion in new proceeds, which will be kept in the firm to cover reinvestment and
operating needs, according to the prospectus. With these assumptions in place, my valuation of Lyft is below:

My story for Lyft

leads to a value of
equity of
approximately $16
billion, with the $2
billion in proceeds
includes, or $14
billion, prior to the
IPO cash infusion.
Dividing by the 279
million shares
outstanding,
computed by adding
the restricted shares
outstanding to the
share count that the
company anticipates
after the IPO, yields
a value per share of
about $59. Any story
about young
companies comes
with ifs, ands and
buts, and the Lyft
story is no
exception. I remain
troubled by the ride
sharing business
model and its lack of
clear pathways to
profitability, but I
think Lyft has picked
the right strategy of staying focused both geographically (in the US) and in the transportation services business. I
also am leery of the special voting rights that the founders have carved out for themselves, but that seems to have
now become par for the course, at least with young tech companies. Finally, the possibility that one of the big
technology companies or even an automobile company may be tempted to enter the business remains a wild card
that could change the business.

The Lyft Pricing

I am a realist and know that when the stock opens for trading on the offering day, it is not value that will determine
the opening bid, but pricing. In the pricing game, investors look at what others are paying for similar companies,
scaling to some common operating variable. With publicly traded companies in mature sectors, this takes the form of
an earnings (PE), cash flow (EV/EBITDA) or book value (Price to Book) multiple that can then be compared across
companies. With Lyft, investors will face two challenges.
● The first is that it is the first ride sharing company to list, and the only pricing that we have for other ride
sharing companies is from venture capital rounds that are sometimes dated (from the middle or early last
year).
● The second is that every company in the ride sharing business is losing money and the book values have no
substance (both because the companies are young and don't invest much in physical assets).
Notwithstanding these limitations, investors will still try, by scaling to any operating number that they can find that is
positive, as I have tried to do in the table below:

It is true that there is substantial noise in the VC pricing numbers and that the operating numbers for some of these
companies are rumored or unofficial estimates. That said, desperation will drive investors to scale the VC pricing to
one of these numbers with the gross billings, revenues and number of riders being the most likely choices. Uber has
the highest pricing/rider and that the metric is lowest for the Asian companies, which have far more riders than their
US counterparts; the revenue per rider, though, is also far lower in Asia than in the US. The companies all trade at
high multiples of revenues and more moderate multiples of gross billings. In the table below, I have priced Lyft, using
Uber's most recent pricing metrics as well as global averages, both simple and weighted:

To the extent that you accept these metrics, the pricing for Lyft can range from $5 billion to $22 billion, depending on
your peer comparison (Uber, Global average, Global weighted average) and your scaling variable (Gross Billings,
revenues or riders). In fact, if I bring in the rumored pricing of Uber ($120 billion) into the mix, defying circular logic, I
can come up with pricing in excess of $30 billion for Lyft. I think that they are all flawed, but you should not be
surprised to see Lyft and its bankers to focus on the comparisons that yield the highest pricing.

Given the way the pricing game is structured, the pricing of the Lyft IPO is going to be watched closely by the rest of
the ride sharing companies, since there will be a feedback effect. In fact, I think of pricing as a ladder, where if you
move one rung of the ladder, all of the other rungs have to move as well. For instance, if investors price Lyft at $25
billion, about 12 times its revenue in 2018, Uber will be quicker to go public and will expect markets to attach a
pricing in excess of $130 billion to it, given that its revenues were more than $11 billion in 2018. The Asian ride
sharing companies, where rider numbers are high, relative to revenues, will try to market themselves on rider
numbers, though it is not clear that investors will buy that pitch. Conversely, if investors price Lyft at only $12 billion,
Uber may be tempted to wait to go public, and continue to tap into private investors, with the caveat being that those
investors will also lower their pricing estimates. The pricing ladder can lead prices up, but they can also lead prices
down, and timing is the name of the game.

The Waiting Game

It is still early and there is much that we still do not know. While some of the uncertainties will not be resolved in the
near future, we will learn more specifics about the offering itself, including the amount that Lyft plans to raise on the
offering day, over the next few weeks. Sometime soon, we will also get the a pricing of the company from the
bankers that have been given the task of taking the company public, and I use the word "pricing" rather than
"valuation" deliberately. The bankers' job is to price the company for the IPO, not value it. Not only should any talk of
value from them be discounted, but if you do see a discounted cash flow valuation from a bank for Lyft, you can
almost bet that it will be a ​Kabuki valuation​, where they will go through the motions of estimating valuation inputs,
when the ending number has been pre-decided.