Monday, October 19, 2015

Dream Big or Stay Focused? Lyft's Counter to Uber!

This is the second in a series of three posts on the ride sharing business. In my first, published in both TechCrunch and my blog, I valued Uber, trying to incorporate the news that has come out about the company and its competition in the last year. In this one, I first turn to valuing Lyft, which is telling a narrower, more focused story to investors than Uber and also look at how the pricing ladder in ride sharing companies has pushed up prices across the board. In the last post, due out on Wednesday, I will look at the ride sharing market as a business.

In my last post, I valued Uber and admitted that the company has made its way to my list of obsessions. My focus on Uber, though, has meant that I have not paid any attention to the other ride sharing company in the US,  Lyft, and I don’t think I have been alone in this process. An unscientific analysis of news stories on ride-sharing companies in the last couple of years suggests that Uber has dominated the coverage of this business. Rather than view this as a slight on Lyft, I would argue that this is at least partially by design, and that it is part of both companies' strategies. Uber is viewed as the hands-down winner of this battle right now, but this is just one battle in a long war and investors define winners differently from corporate strategists.

Valuing Lyft
To value Lyft, I will employ the same template that I used for Uber, though the choices I will make in terms of total market, market share, operating margins and risk will all be different, reflecting both Lyft’s smaller scale and more limited ambitions (for the moment).

The Leaked Numbers
The place to start this assessment is by comparing the ride sharing reach of Lyft with Uber and that comparison is in the table below:
Number of cities in US15065
Number of cities>30065
Number of countries601
Number of rides - 2014140NA
Number of rides (in millions) - 2015ENA90
Number of rides (in millions) - 2016ENA205
Gross Billings (in millions $) - 2014$2,000$500
Gross Billings (in millions $) - 2015E$10,840$1,200
Gross Billings (in millions $) - 2016$26,000$2,700
Estimated Growth for 2015442%140%
Estimated Growth for 2016140%125%
Operating loss in 2014 (in millions $)-$470-$50

The key differences can be summarized as follows. First, Uber is clearly going after the global market, uninterested in forming alliances or partnerships with local ride sharing companies. Lyft has made explicit its intention to operate in the US, at least for the moment, and that seems to have been precursor to forming alliances (as evidenced by this news story from two weeks ago) with large ride sharing companies in other markets. Within the US, Uber operates in more than twice as many cities as Lyft does. Second, both companies are growing, though Uber is growing at a faster rate than Lyft, and that is captured in both the number of rides and gross billings at the companies. Third, both companies are losing money and significant amounts at that, as they go for higher revenues. Note that, for both companies, the bulk of the information comes from leaked documents, and should therefore considered with skepticism. In addition, there are some numbers that come from press reports (Lyft's loss in 2014) that are more guesses than estimates.

The business models of the two companies, at least when it comes to ride sharing, are very similar. Neither owns the cars that are driven under their names and both claim that the drivers are independent contractors. Both companies use the 80:20 split for ride receipts, with 80% staying with the driver and 20% going to the company, but that surface agreement hides the cut throat competition under the surface for both drivers and riders. Both companies offer incentives (think of them as sign-up bonuses) for drivers  to start driving for them or, better still, to switch from the other company. They also offer riders discounts, free rides or other incentives to try them or, better still, to switch from the other ride sharing company. At times, both companies have been accused of stepping over the line in trying to get ahead in this game, and Uber’s higher profile and reputation for ruthlessness has made it the more commonly named culprit. 

The other big operating difference is that unlike Uber, which is attempting to expand its sharing model into the delivery and moving markets, Lyft, at least for the moment, has stayed much more focused on the ride sharing business, and within that business, it has also been less ambitious in expanding its offerings to new cities and new types of car services than Uber.

The Narrative Contrast and Valuation
In my valuation of Lyft, I will try to incorporate the differences that I see (from Uber) into my narrative:
Potential MarketUS-centric, ride-sharing company.Global, logistics company
Growth EffectDouble ride-sharing market in US in next 10 yearsDouble logistics market globally in next 10 years
Market ShareWeak national networking benefitsWeak global networking benefits
Competitive AdvantageSemi-strong competitive advantagesSemi-strong competitive advantages
Expense ProfileDrivers as partial employeeDrivers as partial employees
Capital IntensityLow capital intensityLow capital intensity, with potential for shift to more capital intense model
Management CultureAggressive within ride sharing business, Milder with regulators and media.Aggressive with all players (competitors, regulators, media)
In short, the Lyft narrative is narrower and more focused (on ride sharing and in the US) than the Uber narrative. That puts them at a disadvantage, at least at this stage in the ride sharing market, in terms of both value and pricing, but it could work in their favor as the game unfolds. 

The adjustments to the Lyft valuation, relative to my Uber valuation, are primarily in the total market numbers, but I do make minor adjustments to the other inputs as well. 
  1. Smaller total market: Rather than use the total global market, as I did for Uber, I focus on just the US portion of these markets. That reduces the total market size substantially. In addition, I assume that, given Lyft’s focus on ride sharing, that its market is constrained to be the US car service market. Notwithstanding these changes in my assumption, the potential market still remains a large one, with my estimate about $150 billion in 2025. 
  2. National networking benefits: Within the US market, I assume that the increased cost of entry into the business that I referenced in my last post on Uber will restrict new competitors and that Lyft will enjoy networking benefits across the country, enabling it to claim a 25% market share of the US market. 
  3. Drivers become partial employees: My assumptions on drivers becoming partial employees and competition driving down the ride sharing company slice of revenues will parallel the ones that I made for Uber, resulting in lower operating margins (25% in steady state) and a smaller slice of revenues (15%). 
  4. Lyft is riskier than Uber: Finally, I will assume that Lyft is riskier than Uber, given its smaller size and lower cash reserves, and set its cost of capital at 12%, in the 90th percentile of US companies, and allow for 10% chance that the company will not make it.
The value that I derive for Lyft with these assumptions is captured in the picture below:

Spreadsheet with Lyft Valuation (September 2015)
The value that I get for Lyft is $3.1 billion, less than one seventh of the value that I estimated for Uber ($23.4 billion) in my last post.

The biggest danger that I see for investors in Lyft is that the company has to survive the near future, where the pressure from Uber and the nature of the ride sharing business will create hundreds of millions of dollars more in losses. If the capital market, which has been accommodating so far, dries up, Lyft faces the real danger of not making it to ride sharing nirvana. It is a concern amplified by Mark Shurtleff at Green Wheels Mobility Solutions, a long-time expert and consultant in the ride sharing and mobility business, who points to Lyft's concentration in a few cities and cash burn as potential danger signs.

Pricing The Ride Sharing Companies
While none of the ride sharing companies are publicly traded and there are therefore no prices (yet) for me to compare these valuations to, there have been investments in these companies that can be extrapolated at some risk to estimate what these investors are pricing these companies at. In keeping with my theme that price and value come from different  processes, recognize that these are prices, not values.

The VC Pricing
I took at look the most recent VC investments in ride sharing companies and what prices they translate into.
CompanyLast VC round investment amount (in US$ millions)DateLead InvestorsImputed Pricing for the company (in US $ millions)
Lyft$530.0015-MayRakuten, Didi Kuaidi, Carl Icahn$2,500.00
Didi Kuaidi$2,000.0015-JulChina Investment Fund$15,000.00
Ola$310.0015-MarDST Global$2,300.00
GrabTaxi$200.0015-JulCoatue Management & others$1,500.00

* Sources: Public News Reports, Mark Shurtleff
The danger in extrapolating VC investments to overall value, which is what the press stories that report the overall prices do, is that the only time that a VC investment can be scaled up directly to overall value is if it comes with no strings attached. Adding protections (ratchets) or sweeteners can very quickly alter the relationship, as I noted in this post on unicorns

The Drivers of Price
Notwithstanding that concern, is there a logic to this pricing? In other words, what makes Uber more than three times more valuable than Didi Kuaidi and Didi Kuaidi six times more valuable than Lyft? To answer these questions, I pulled up the statistics that I could find for each of these companies:

CompanyEstimated Value (Price)Gross Billing in $ millions (2015)Revenues (2015)*Operating Profit or Loss (2015)Cities served (2015)# ridesPotential Market (in $ millions)# Drivers
Lyft$2,500$1,200$300-$100 65156$55,000100000
Uber$51,000$10,840$2,000-$470 3001460$205,000800000
Didi Kuaidi$15,000$12,000$450-$1,400 1372190$50,0002600000
Ola$2,500$1,200$150NA 85100$13,000250000
GrabTaxi$1,500$1,000$50NA 26300$6,00075000
BlaBlaCar$1,600$600$72NA 100NA$20,000NA

* The revenues are estimated using the revenue slice that these companies report, but with customer give aways and other marketing costs, the actual revenues were probably lower.

Note that almost all of these numbers come from leaks, guesses or judgment calls, and that there are many items where the data is just not available. For instance, while we know that Ola, GrabTaxi and BlaBlaCar are all losing money, we do not know how much. At the risk of pushing my data to breaking point, I computed every possible pricing multiple that I could for these companies:

CompanyValue/Gross BillingValue/RevenuesValue/CityValue/Ride Value/Potential Market
Didi Kuaidi1.2533.33$109.49$6.850.3000

On a pure pricing basis, Lyft looks cheap on every pricing multiple, and Uber looks expensive on each one, perhaps providing some perspective on why Carl Icahn found Lyft to be a bargain, relative to Uber. Didi Kuaidi looks expensive on any measure other than gross billing and GrabTaxi looks cheap on some measures and expensive on others.  It is worth noting that these companies have different revenue models, with Lyft and Uber hewing to the 20% slice model, established in the US and Ola (which has more of a taxi aggregating model), at least according to the reports I read, follows the same policy. BlaBla is mostly long-distance rides and gets about 10-12% of the gross billing as revenue, GrabTaxi gets only 5-10% of gross billings, Didi Kuaidi, which had its origins in a taxi hailing app, gets no share of a big chunk of its revenues and BlaBlaCar derives its revenues more from long distance city-to-city traffic than from within city car service. Given how small the sample is and how few transactions have actually occurred, I will not attempt to over analyze these numbers, other than wondering, based on my post on corporate names, how much more an umlaut would have added to Über's hefty price.

With all of these companies, the prices paid have risen dramatically in the last year and a half and I believe that this pricing ladder is driven by Uber's success at raising capital. In fact, as Uber's estimated price has risen from $10 billion early in 2014 to $17 billion last June to $40 billion at the start of 2015 to $51 billion this summer, it has ratcheted up the values for all of the other companies in this space. That should not be surprising, since the pricing game almost always is played out this way, with investors watching each other rather than the numbers. As with all pricing games, the danger is that a drop in Uber's pricing will ratchet down the ladder, causing a mark down in everyone's prices.

Big versus Small Narratives
If narrative drives numbers and value, which is the argument that I have made in valuing Uber and Lyft in these last two posts, the contrast between the two is also in their narratives. Uber is a big narrative company, presenting itself as a sharing company that can succeed in different markets and across countries. Giving credit where it is due, Travis Kalanick, Uber’s CEO, has been disciplined in staying true to this narrative, and acting consistently. Lyft, on the other hand, seems to have consciously chosen a smaller, more focused narrative, staying with the story that it is a car service company and further narrowing its react, by restricting itself the US. 

The advantage of a big narrative is that, if you can convince investors that it is feasible and reachable, it will deliver a higher value for the company, as is evidenced by the $23.4 billion value that I estimated for Uber. It is even more important in the pricing game, especially when investors have very few concrete metrics to attach to the price. Thus, it is the two biggest market companies, Uber and Didi Kuaidi, which command the highest prices. Big narratives do come with costs, and it those costs that may dissuade companies from going for them. 
  1. It can distract: Big narratives will require companies to deliver on multiple measures and that may distract management from more immediate needs. 
  2. It can be costly: Having to grow faster and in multiple markets (different businesses and different geographies) at the same time will be more costly than focusing on a smaller market and having more measured ambitions.
  3. It can create disappointments: The flip side of convincing investors that you can reach for the heights is that if you don’t make it, you will disappoint them, no matter how good your numbers may be. 
With Uber, you see the pluses and minuses of a big narrative. It is possible that Uber Eats (Uber’s food delivery service), UberCargo (moving) and UberRush (delivery) are all investments that Uber had to make now, to keep its narrative going, but it is also possible that these are distractions at a moment when the ride sharing market, which remains Uber’s heart and soul, is heating up. It is undoubtedly true that Uber, while growing at exponential rates, is also spending money at those same rates to keep its big growth going and it is not only likely, but a certainty, that Uber will disappoint their investors at some time, simply because expectations have been set so high. 

It is perhaps to avoid these risks that Lyft has consciously pushed a smaller narrative to investors, focused on one business (ride sharing) and one market (the US). It is avoiding the distractions, the costs and the disappointments of the big narrative companies, but at a cost. Not only will it cede the limelight and excitement to Uber, but that may lead it to be both valued and priced less than Uber. Uber has used its large value and access to capital as a bludgeon to go after Lyft, in its strongest markets.

As an investor, there is nothing inherently good or bad about either big or small narratives, and a company cannot become a good investment just because of its narrative choice. Thus, Uber, as a big narrative company, commands a higher valuation ($23.4 billion) but it is priced even more highly ($51 billion). Lyft, as a small narrative company, has a much lower value ($3.1 billion) but is priced at a lower number ($2.5 billion). At these prices, as I see it, Lyft is a better investment than Uber. 

Block and Draft
It is clear that Uber and Lyft have very different corporate personas and visions for the future and that some of the difference is for outside consumption. It serves Uber well, in its disruptive role, to be viewed as a bit of a bully who will not walk away from a fight, just as it is Lyft’s best interests to portray itself as the gentler, more humane face of ride sharing. Some of the difference, though, is management culture, with Uber drawing from a very different pool of decision-makers than Lyft does. If this were a bicycle race, Uber reminds me of the aggressive lead rider, intent on blocking the rest of the pack and getting to the finish line first, and Lyft is the lower profile racer who rides just behind the leader, using the draft to save energy for the final push. This is going to be a long race, and I have a feeling that its contours will change as the finish line approaches, but whatever happens, it is going to be fun to watch!

YouTube Version

Ride Sharing Series (September 2015)


Unknown said...

Hi Professor,

Love reading your posts as always.

I was wondering perhaps whether it would make sense to include Yandex.Taxi in the valuation?

It is hard to pinpoint the precise financials and billings (best way to do it is to look at the company's non core/other revenues).

Having said that, according to an analyst report, in 2013 Yandex.Taxi generated 134.4mm rub in revenues, which amounted to 0.3% of total revenues at the company, or 52% of non-core revenues.

I have also attached the latest Q2 2015 report, which puts other revenue at 3%. If we take a conservative estimate of 50% of other revenue (or 1.5% of total revenues coming from Yandex.Taxi we arrive at a figure of 208.8MM rub). The average FX rate over the same period was 52.65 USD/RUB, which yields quarterly revenue of USD 3.965MM. Overall this puts the company in a much smaller valuation range than the other companies listed, however, given the potential and the monopolic element of the market (this would be the same as Google launching its own ride hailing service to compete with Uber in the USA), I was wondering whether it might be worth having a deeper look at.

The FX fluctuations make it a difficult play, and also the potential lagging in internet advertising as the Russian economy experiences a downturn, however my second point is maybe it may be worth looking at YNDX as an emerging markets internet play as well as a small exposure to car sharing in Russia, CIS and maybe even Turkey?


Anonymous said...

Hi Prof,

I wanted to get your thoughts on whether it is correct to say that Uber is priced at $51 billion ? $51 billion number would have most probably been arrived at by the price per share from the latest round of financing applied to total outstanding shares that Uber has.

But as in most VC companies, subsequent rounds get certain rights and preferences over the previous rounds. So is it fair to use the price from the latest round and apply to all shares ?

Isn't a better indication of price arrived at by using option pricing method (back solve), which will price the shares issued in the previous rounds lower compared to the share price from the most recent round (assuming the most recent round ranks higher in terms of rights and preferences) and would eventually result in a price of Uber much lower than $51 billion.

Looking forward to your thoughts,


Anonymous said...

This article is an interesting exercise.
Perhaps it is not relevant to the desired objectives, but it does seem the analysis above ignores several aspects to Uber and Lyft which are not financial metrics, but which manifest in very real ways.
These include the corporate mentalities of both companies.
Uber is infamously combative with respect to existing regulatory authorities and is reluctant to engage in any activities related to benefiting drivers (no tipping, last to implement insurance and earn guarantees, last to implement many other capabilities like navigation in app).
This can also be seen in more specific examples like working with airports to allow legal operation of ride sharing services there.