For just a moment, in the summer, it seemed that Lyft (NASDAQ:LYFT) was going to give its first public investors a profit. On July 19 it closed at $67.45, buoyed by favorable moral comparisons with rival Uber (NYSE:UBER).
But its results for the June quarter showed no reason for optimism. The shares in both ride-hailing companies are now down over 40% from their initial levels. Lyft is due to report “earnings” on Oct. 30, a loss of $1.67 per share (about $370 million) is expected on revenue of $912 million.
With 5% more revenue and continuing losses, it may be time to admit that this whole computer-based sharing sector of the economy is an investment black hole.
So, what happened?
The Savings Weren’t There
The idea behind these companies was to make a market. Computers would handle the complex dance of pricing, employment and back-end management previously done through regulated taxi companies.
It worked. The taxi companies and their government overseers were disintermediated. Cities that didn’t previously have taxi services suddenly had them.
The problem is that both sides — drivers and customers — lost protections the old model had given them. Passengers lost the taxi company’s assurance of safety. Drivers lost the companies’ assurance of a living wage.
After first trying to ban ride-hailing services, cities have moved to regulate them. They have forced drivers away from crowded airports, limited their ability to cruise awaiting passenger calls, sought to impose a living wage and cut off ancillary revenue streams like advertising.
The pitch the companies made to investors was that scale would solve the problems of profitability. This hasn’t happened. This is why hedge funds and investors are walking away.
There was also the idea that drivers were just a short-term solution to the mobility problem. The promise was that the cars would soon drive themselves. The hope was that profits from renting electric scooters and bikes would provide a financial boost while waiting for this to happen. But self-driving taxis aren’t coming any time soon, and cities were quick to ban the scooters, because they littered the streets and killed users.
Is Profit Possible?
What investors are now asking is whether profit is even possible.
Lyft insists it can make a profit as marketing costs decline and it continues to scale. Its losses, as a percentage of revenue, have declined, just not quickly enough to satisfy private investors, who demanded it go public, or public investors, who have not taken the losses well.
Some Lyft analysts see hope in alternative ride-hailing schemes, like food delivery or moving packages. They compare its slow move toward profitability with Amazon (NASDAQ:AMZN), which lost money for years. But Amazon always had positive operating cash flow. Lyft’s $15 million of cash from operations during the June quarter came about only because stock-based compensation plunged.
The Bottom Line on Lyft Stock
Scale doesn’t solve all of a market’s problems.
Scale doesn’t guarantee safety. In the physical world, scale can create problems of its own, like overcrowding.
Most analysts following Lyft still consider the stock a “buy.” Maybe they still have stock that needs to be sold, because I don’t see it.
Ride-hailing should have evolved the way Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Waymo has evolved autonomy, starting with tests that prove the technology in a difficult terrain, then expanding only as the most difficult problems are solved.
But hindsight is 20-20, and hindsight doesn’t make today’s Lyft worth buying.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
