Lyft's IPO: Buyer Beware

Commentary3 years ago
We surveyed ~40 hedge funds, and most were not positive on Lyft's IPO. Long-term fundamentals were their main concern.
Lyft, the #2 player in what has been deemed to be a winner-take-all market, is opening to the stock market. We surveyed ~40 hedge fund investors in our first Titan Insider Pulse

Insider Pulse##

  • 70% of hedge fund investors we surveyed were not positive on Lyft
  • The main reasons: intense competition (Uber), weak profits (e.g. lots of free Lyft rides), and lofty valuation
  • The 30% of funds that were positive said it was mostly for technical reasons like investor demand, not for fundamentals

Our Take##

  • We too are concerned about Lyft's long-term fundamentals
  • The market is clearly massive ($1.2T transportation market) and Lyft has built a strong network of drivers/riders and a top-notch culture
  • However, Lyft hasn't proven to us that it can sustainably grow without sacrificing profits on each ride via free rides and other promotions
  • That said, the stock could rip in near term due to temporary technical factors like scarcity ("only ride-sharing stock on the market")

Unit Economics##

  • Lyft, like Uber, has been subsidizing rides for quite some time, with help from the venture capital industry
  • With ride prices artificially low in our opinion, rider demand could weaken once prices normalize higher
  • Key question: can Lyft add more drivers and more riders without incentivizing both sides with promotions and free rides?

Takeaway##

We're excited about Lyft's large addressable market. However, its unit economics are much less proven. Competition is intense, and valuation seems priced for perfection (no room for error as a business). Put them all together, and the long-term fundamentals seem mixed to us.

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