With ride-hailing service Lyft having priced its initial public offering at $72 a share — valuing the company at $24 billion before its stock begins trading on Friday — there’s only one conclusion.
Someone has their head in the cloud.
Not the clouds — the cloud. The price, and the trade, only hold up if you see San Francisco-based Lyft
as an heir to cloud computing companies like Salesforce.com
Rackspace, and of course Amazon.com
Even giants best known for other businesses, like Alphabet
have juiced valuations by getting in on a cloud-computing trend investors are willing to pay up for.
The purpose here isn’t to dispute whether they should. But if you’re considering chasing Lyft at the post-first-day-pop price, likely to produce a valuation as high as $30 billion, you should consider whether Lyft really is in a category like that.
First, let’s run some numbers. At $30 billion, Lyft is commanding 14 times last year’s sales — not earnings, but sales. Lyft has no profits by any standard — not net income, not operating or free cash flow. It’s going to be a while before they arrive, and even then, they’ll be modest for several years.
Lyft is a different bet than well-known, richly valued Web names. Amazon has stuck to its now decades-old formula of investing heavily, producing modest net income as equipment like cloud-computing servers are amortized but delivering killer cash flow.
For all of Donald Trump’s caviling about Amazon’s low profits and high stock price, Amazon’s $871 billion market value is just 28 times last year’s operating cash flow, which was 60% higher than the year before, as cloud computing took off in earnest. Growth like that gets you a premium, and it should. Amazon’s stock price is 3.3 times forecasted 2019 sales. Twitter
long considered financially shaky for a dot-com, is at 19 times trailing cash flow and seven times this year’s sales. Facebook
and Alphabet are cheaper still — and always were, even at their IPOs.
Those are some standards Lyft must live up to — even exceed — to be worth what people will pay for its shares in the near term.
People do that if they’re convinced they are buying into a trend that will grow and grow, as new modes of business take market share from the old. That happened in e-commerce — though not enough to turn most non-Amazon online retailers into good stocks — and is happening now in enterprise computing.
Lyft’s ticket is that ride hailing will soon make car ownership as obsolete as corporate-owned software. That means the $1 trillion Americans spend yearly on cars, gasoline, insurance and the like will be spent instead on services taking them where they want to go, when they want to go there, with nearly the flexibility and autonomy of car ownership.
Some sell-side analysts buy that, just as their peers covering Salesforce bought the cloud computing story at Salesforce’s 2004 IPO. But the evidence that car ownership is going away is, ahem, thin and weak.
Last year, tech consulting firm IDG estimated that 77% of enterprises had at least one application running on software it rented through a cloud-computing service, rather than code the enterprise owned and ran on its own servers. About 30% of computing dollars were spent on the cloud — but the 77% tells you that with companies experimenting with the cloud, many more the dollars will go there soon. Cisco Systems
which sells to both markets, thinks cloud applications will drive 95% of data center traffic by 2021.
By contrast, Lyft says about 1% of U.S. passenger miles are traveled using ride-hailing apps. There’s no sign the new industry has cut into auto sales one whit.
One of these is not like the other. Ergo, one of these stocks is not like the others.
To be sure, reputable people think that will change — first gradually, then suddenly. But for those who don’t live in San Francisco or New York City, the combination of auto-driven commutes and the simple fact that jobs, restaurants, leisure attractions and everything else are farther apart than in cities means that the economics of the disruption Lyft predicts are no slam dunk.
It’s just as easy to see disruption working out this way. As electric cars get cheaper than gas-powered models in a few years, the inflation-adjusted cost of buying (and, especially, operating) a car one owns declines. As they become self-driving — assuming the safety of those cars is what advocates say it will be — the cost of auto insurance drops to nearly nothing, as some experts think. And the cost of auto ownership dips, while the autonomy of having your own ride at your own beck and call remains.
That’s a better solution that ride-hailing all the time, at least in suburbs, where a plurality of us live. If this is what happens, I say folks stand pat.
I could be wrong. At some point, over many years, transport-as-a-service may peel away the need for second cars, and even some city dwellers’ first cars. (Though that 1% of miles driven number should give you pause about how rapidly). When it costs less than $50 to get an Uber to the airport in North Carolina, for example, or less than $18 to get a McDonald’s meal through Uber Eats, ditching cars might be a thing.
Bet on Lyft if you want. But do it based on the world of transportation we know. In that world, Lyft is a useful supplement to car ownership, and a replacement for a very small number of people. As long as that stays true, $30 billion for Lyft is a big lift.