Why Lyft Would Prefer You Take a Scooter
(Bloomberg) -- I want to talk through two facts that I found discouraging about the financial viability of Lyft Inc.
First, Lyft disclosed in its IPO document that it generates about the same average revenue for each car ride as it does from each trip on Lyft's rented bicycles and scooters. And second, Lyft's financials show that its average expense for each ride has gone up.
The financial dynamics and spending needs of the on-demand transportation industry remain in flux, but I found these both not great signs for Lyft.
Here are more details. Hunt on page 80 of the IPO filing for the disclosure that there's currently "no material difference" between the revenue per ride from cars versus bicycles and scooters. The company's average revenue per ride was $3.75 in the fourth quarter.
People don't pay much to rent a scooter for a mile or two, but remember the important difference compared to a car: There's no driver in the equation when Lyft rents a scooter or bike, so the company keeps almost 100 percent of the fare. With a car ride, the driver effectively ends up with the majority of that money.
That might be good news for Lyft's economics from scooter and bike rentals. Maybe. But for the car business, think about all the money and effort Lyft puts into marketing to land new recruits, tuning algorithms to better match supply and demand, staffing driver support and operations centers, paying lawyers to deal with legal disputes and setting up car leasing programs.
For all that, the company ends up with about the same amount of money as when a user forks over $4 to rent a scooter for 15 minutes, which requires far less of the company's resources.
That's on the revenue side. On the cost side of the equation, the narrative is different depending on how you look at Lyft's spending efficiency.
As a share of its revenue, Lyft's costs have come down and the company's losses have narrowed although they're still high. I also wanted to look at what the company is spending for each product it sells, which is a ride. On that basis, Lyft's expenses are getting worse.
Lyft doesn't break out costs in quite this way, but it discloses enough to calculate this: At the beginning of 2017, the company spent $4.31 per ride on insurance, processing credit card payments, customer support staff, investments in driverless cars, advertising and other expenses.
Fast forward to the fourth quarter of 2018, and the cost per ride had increased to an average of $5.27. For full years, the average cost for each ride declined from 2016 to 2017, but rose last year.
To Lyft's credit, its revenue per ride rose faster than the average cost. And the company has been investing in future projects such as autonomous cars, which push up expenses. But even Lyft's basic cost of revenue, which excludes driverless technology investments, has increased since the beginning of 2017.
None of this may matter to potential IPO investors. The company has devoted itself to growing fast, and it has. That's what new stock buyers seem to want. It losses are less ugly. And it's good that investors are willing to take a flyer on fresh approaches to transportation and other fields that could use new ideas.
Still, Lyft and rival Uber Technologies Inc. are aiming for large valuations, so investors should look every which way at revenue and cost economics, and ask the companies when these numbers will materially improve. If the answer is "when driverless cars happen," that's a long time to wait for a viable business.
(This article was corrected to remove a reference in the fifth paragraph to certain driver incentives, which aren’t included as expenses in per-ride calculations.)
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