Ride sharing companies have revolutionized the way we commute. While Uber has gone global and continues to expand to other businesses, Lyft has shown a much smaller narrative and is present only in US and Canada. Lyft just filed for a much awaited IPO and should get listed by the end of this month.
I had earlier valued lyft at around $5 bn in November last year. The data and assumptions were based on the limited statistics that were available on the internet. Although, I did expect annual revenue of ~$2 bn and loss of ~$900 mn and had baked these numbers in my valuation, but I was too far off in the number of active users / riders (my source of info led me take 32 mn and 23 mn users in 2018 and 2017 respectively). This statistic is key to valuing companies such as Lyft and Uber, which are making shared economy mainstream. Now since Lyft’s financials are public, we know the active number of users is 18.6 mn (as of Q4 2018 up from 12.6 mn in Q4 2017). I plugged the actual user based statistics in my model and the valuation that I get is $17 billion.
As earlier, the valuation framework that I have used has been pioneered by the renowned NYU Stern Prof. Aswath Damodaran. In his paper, Prof. Damodaran has explained how to incorporate user economics in a DCF Valuation. The fundamental equation to value such companies that Prof. Damodaran gives is simple and intuitive:
Value of a user based company = Value of existing users + Value added by new users – Value eroded by corporate expenses
Value of existing users (or customer lifetime value)
Each valuation needs to have a fact based story, which is essentially what we think of the company, its growth potential and the risk associated with its users/riders (i.e. would users stick or ditch).
Revenue per active user
Fact: Lyft reported a revenue of ~$130 per active user in 2018, up from ~$100 and ~$67 in 2017 and 2016 respectively. This translates to 30% revenue per user growth in 2018 and 50% growth in 2017. Moroever, Lyft’s share of revenue from gross billings is 26.7% ($2.15 bn revenue/$8.1 bn worth bookings).
Story: I believe Lyft’s wallet share would continue to grow, but the growth rate would continue to decrease from 50% (2017), 30% (2018) to 25% (2019) and 3% (Risk Free Rate in 2028).
Cost of Revenue & Operating Profit
Fact: After removing cost of revenue (which includes insurance, payment processing charges, technology costs and amortization), operating profit per active user is ~$55 in 2018, up from ~$38 and ~$13 in 2017 and 2016 respectively. This translates to a cost of revenue of 57.7% in 2018
Story: I believe the cost of revenue would be more or less the same in the near term, but would decrease in the long term as the company optimizes its operations
User Stickiness
Fact and Story: Considering that ride sharing businesses have disrupted the market with many users preferring it over their own cars (I certainly do!), I reckon that a major chunk of the existing ride sharing users would stick, although their loyalty to one company is uncertain. A subscription business model would have more user stickiness as opposed to a transaction based. With Lyft using loyalty programs and with its focused narrative on ride sharing, I go on to assume that 90% of riders would stick every year.
Using the assumptions, I go onto project after tax profit (i.e. by projecting revenue and cost) per user into the future. I take the present value of these future cash flows using a 10% cost of capital (75th percentile of global companies) and then adjust this present value for user stickiness. I get a customer lifetime value or value per existing user/rider of $450. With 18.6 million active riders, the total value for all existing customers is $8.4 billion
Value added by new users
Number of new users/riders added every year
Fact: Lyft reported a 18.6 mn active riders at the end of 2018, up from 12.6 mn and 6.6 mn in 2017 and 2016 respectively. This translates to 48% user growth in 2018 and 91% growth in 2017.
Story: With more and more people ditching their cars (and lease rentals) and opting for on demand ride sharing, I believe Lyft would be able to tap new users every year, but the growth rate would continue to decrease from 91% (2017), 48% (2018) to 25% (2019) and 3% (Risk Free Rate in 2028). The total users added each year is adjusted for user stickiness
User/rider acquisition cost
Of the entire amount Lyft spent (Revenue + Loss), it spent $1.24 bn of it in servicing existing users (reported as Cost of Revenue in the P&L) and ~$0.45 bn in general & admin expenses. The rest of the spend (~$1.14 bn), which includes sales, marketing and operations can be attributed to acquiring new customers (18.6 – 12.6 = 6 mn). The cost of acquiring a customer that I get is ~$190
Total value added by new users
Netting off user acquisition cost ($190) from the user lifetime value ($450), I get the value added by each new user to be ~$260.
I go on to project the value added by new acquired users/riders each year by multiplying the calculated new users each year with the value added by a new user each year compounded with the inflation rate. I then take the present value using a cost of capital to arrive at the total value added by new users to be $11.5 bn (Cost of capital is taken as 12%, which is higher than the cost of capital used for existing users. A cost of capital of 12% occurs at the 90th percentile for US companies )
Value eroded by corporate expenses (G&A)
Quoting from the S-1 prospectus – “General and administrative expenses primarily consist of certain insurance costs that are generally not required under TNC or city regulations, personnel-related compensation costs, professional services fees, certain loss contingency expenses including legal accruals and settlements, claims administrative fees and other corporate costs. Following the completion of this offering, it is expected to incur additional general and administrative expenses as a result of operating as a public company.” Corporate expenses are assumed to grow at 4% every year. Discounting the future cash outflows, I get the present value of corporate expenses of close to $5 bn
Putting it all together
Value of Lyft $14.9 bn = Value of existing users $8.4 bn + Value added by new users $11.5 bn – Value eroded by corporate expenses $5 bn
We also need to account for employee stock options ($609 mn), cash ($517.7 mn) and IPO proceeds ($2000 mn)
Removing employee stock options, and adding cash and IPO proceeds, I get the value of equity to be $16.8 billion
Since, the number of shares outstanding is 279 mn, I get a share price of $60.25 per share
Valuation is very sensitive to my assumptions on growth and user stickiness, which in turn depend upon Lyft’s ability to acquire and retain customers. The assumptions I have taken, although reasonable in my view, might be high or low. I do not claim any certitude to these numbers. As Prof. Damodaran says your story should drive numbers. Your story can very well be different from mine. Any higher values of these metrics would result in a higher valuation.
Please do let me know what you think in the comment section.
