Chit Chat Stocks - Lyft (Ticker: LYFT) Not So Deep Dive

Episode Date: July 25, 2023

Lyft, Inc. (LYFT) is a ride-sharing company that provides on-demand transportation services, operating in numerous cities across the United States and Canada, but facing regulatory and competitive challenges in the evolving transportation industry. At the end of the month, we will publish an Arch Capital episode that will cover the company: Coupang. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Lyft. Enjoy the show! ****************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: https://chitchatmoney.substack.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Contact us: [e-mail] Timestamps Company Background | (3:11) Industry | (16:04) Management & Ownership | (20:10) Earnings | (25:24) Balance Sheet | (31:07) Valuation | (33:52) Our Analysis | (35:29) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chit Chat Money. My name is Brett Schaefer, and I'm joined as always by my co-host, Ryan Henderson. We are continuing our Fallen

Angels month. And I think I got to say the businesses may be getting, as a little teaser, We set it up perfectly where they're getting worse and worse and worse each week. This week, we're covering Lyft. Last week, we covered Pinterest. The week before, we covered SoFi. And next week, we're going to cover what has turned into a penny stock, WeWork. But that's a fun story to always go over. Today, though, yeah, we're covering Lyft.

Ryan, are you excited to check out this one? It always seems interesting because it's kind of a duopoly market. We'll get into a lot of that. But during this episode, we're going to go through the history of Lyft, how the business model works, how the management team is currently operating, what their executive compensation is, earnings, what we think about the business, some fundamental projections going forward. I think the management part is going to be interesting because they're in a weird, weird spot right now for any, I guess, listeners who want access to the charts we have here,

our show notes, the stuff we're going to be using to get all our information for this episode, sign up to the free newsletter that goes along with every single one of our not so deep dives. And that link will be in the show notes, or you can search chit chat money, sub stack or search chit chat money on the sub stack sub stack app. I'm sure everyone has that app now, Ryan, anything else before we get started? at some point in there you asked me if i was excited so and then i got to answer yeah uh yeah this was actually fun to research um i i mean you made it sound bad by saying that they're getting worse and worse the whole point of the fallen angels theme is that some of these

you know most stocks don't drop 80 to 90 because you know investors just soured one day it's typically because there's something wrong with the business but the upside is potentially higher if some of them figure it out and so i do think in lyft's case it's one where if they can figure it out i mean it's certainly the opportunity is there and so yeah as we'll go through it the stock is cheap if you try to make the numbers work it just depends whether you believe those numbers right um so let's talk about what they do i think most people probably have a pretty good understanding of this but lyft is a ride-sharing marketplace that competes directly with uber plain and simple so if you're not from the u.s or maybe you're not familiar with the service

it just means that people that people can use their cars to join lyft's network and then they can just offer rides to anyone who needs them on lyft and in exchange riders pay a fee or a fare each time the driver gets a big chunk but lyft takes a 25 cut for arranging the ride and the ride sharing marketplace is the majority really the only driver of lyft's business now i mean there's some other stuff i'll talk about that in a second but when you look at something like uber uber also has logistics it has uber eats which is the um a food delivery side and really not even food delivery they have like grocery delivery as well so i mean it's um it's more of a holistic business than lyft is lyft is really kind of a pure play on the ride sharing space

um anyway when we talk about the the market share in the u.s brett's going to talk about this a little bit lyft is kind of the second player here they they have about 29 market share depending on which estimates you use, but Uber's the big player, Lyft a little bit smaller, but certainly still a formidable competitor. So let me go through some of the other services and then we can talk more about where we think Lyft is heading. So they've got some stuff that some of it's complimentary to its core business, but some of the other stuff is kind of just random. And some of it's apparently getting shut down soon. So some of these products might not around by the end of this year okay and so one of the products is express drive this is a rental car

program for drivers who don't have access to a lyft qualified car so it's actually quite common i think uber does the same thing um this is very complimentary to the business basically if you want if someone wants to be a driver for lyft they can rent a car from lyft and drive it it around and earn money and pay back that those uh that basically rental expenses um over time and now it sounds kind of dystopian and i've had a writer that was in in this situation and it sounded very uh very hard to make money no one forced him to hey no one forced him to get that loan so no 100 and it's it's uh it i mean it's giving them it's giving drivers the option So like I said, very complimentary.

It just, I imagine it's hard to make money when you're renting the cars and the cars are expensive. Anyway, the second one here is Lyft Rental. So I know that sounds probably awfully similar to Express Drive or the rental car program we just talked about, but this is different. It's more similar to a service like Turo, if people are familiar with that, where you're actually basically renting out your car well in Turo's case it's individuals renting out their car with Lyft I believe it's Lyft drivers you basically can give consumers your car for long

trips instead of being driven around so instead of ride sharing it's more of car sharing if that makes sense yeah they do try to rebrand those services but Turo is really just car rentals through an app right yeah it's peer-to-peer car rentals basically and lifts lifts kind of the same uh the third one here is light vehicles so this is their bikes and scooters business not a lot of color is given on this but from what i understand the economics are quite poor i can give you anecdotal evidence all day about how bad of a business this must be because it's It's whatever, we can get into this later, but I imagine the depreciation on these things has to be ridiculous because I see people, yeah, drunk people riding around on these

things, chucking them into bushes, just, I mean, like no regard for the property and there's big insurance costs here as well for Lyft. So it, whatever, it's a part of the business. It was something I think they invested it in a while ago. It's still around. And the CEO has stated that it's kind of complimentary to the business because with, I'll talk about here in a second, there's like a membership program where you can get cheaper rides. But really, I think it's its own segment and a little foreshadowing for my future growth opportunity. I think it needs to go.

Lyft Autonomous is the next segment. This is just an autonomous driving partnership. I think it feels like every ride-sharing or delivery company has something like this. So they have, I think, kind of this pilot program of some autonomous cars driving on the Lyft network in Las Vegas right now. I don't know how much this will expand, but obviously, if autonomous cars come, it's probably detrimental to Lyft's business, I would think. people see it as an opportunity, but I'm guessing it's more of a threat. So who knows? I guess they're just trying to pour money into the technology and see if something hits. The last couple of things I'll talk about is these are more like driver slash rider benefits.

So Lyft Pink is their membership program. It's $9.99 a month. You apparently get faster pickup and savings on things like Lyft Lux, which is more of their nicer cars experience on the Lyft platform, this membership program has had way worse adoption than the dash pass or Uber premium, whatever they call it. So, um, it's, it's been a rough point for them, but it's something they offer. So, you know, maybe it's worth it for certain writers. And I think you also get like cheaper rides on the scooters and bikes as well. So, yeah.

And we might see the new management team again, as we'll discuss in one of the next sections, revamp this with a new product offering. Yeah. And then the last thing I'll mention is insurance. So Lyft legally has to insure a couple of things. First, it has to offer drivers some insurance in cases where they might not have it. So little quote here from, I looked up the Lyft insurance program. It just says Lyft maintains third-party liability insurance for covered accidents if your personal insurance does not apply. So for drivers, it's people that it's your primary auto insurer first and then kind of lift second for anything where they don't cover it. They also have to maintain some insurance for scooters and bikes, which I imagine is more like personal injury. I've actually heard of an incredible amount of personal injuries on those scooters and bikes. So it doesn't surprise me. They are dangerous.

And they have had this consistent buildup in insurance reserves, which is they're reserving cash for expected losses, which has led to worsening cash flow. Well, not, I mean, technically not cash flow, but I mean, yeah. The buildup on insurance reserves? Yeah. I mean, isn't it technically just like, it's not like they're paying it out yet. It's still on the balance. I mean, yeah, it's gonna be, but like, sometimes it's just like a, you know, it's not actually hitting cashflow yet, but yeah, I mean, they're going to pay it out. Right. Yeah. I mean, it's okay. It's just leading to worse cash from operations number.

Yeah. I mean, it's gonna, it's gonna hurt the business over the longterm. I guess it's just kind of nitpicky, whatever it actually leaves the balance sheet. Right. Yeah. I mean, I'm not, I guess I'm, we're certainly not insurance experts by any means. I'm just looking at the cashflow statement and what are the biggest, The two biggest differentiators between gap income and cash flow is the insurance reserve bill and stock-based compensation.

Right. It's going to – yeah, it's going to – it hurts their business. It's an expense for them. Let's talk about the history real quick. Sort of a kind of your typical Silicon Valley story, honestly. A couple of years before 2008, there was a student at UC Santa Barbara named Logan Green. He started a car-sharing service for students that were trying to commute from big cities. Apparently, it was fairly successful, just a couple of guys working on it.

It wasn't a huge success, but there was a guy named John Zimmer who was working at Lehman Brothers who connected with this guy via Facebook. apparently they had a shared interest in transportation which uh you read some of these like tech crunch or verge stories or like uh business insider and it's like all the founding stories it's like from the age of four they had an interest in transportation it's like okay i just anyway anyway and then then they turn into a movie with these strange stories that may or may not be true and people think that's how it all happens every time it's like no they just were on some laptops and an opportunity to make some money and they, they, you know, built up the platform. Um, anyway,

so the John Zimmer guy thought the platform was interesting. Um, so he, he was in a financial analyst at Lehman brothers rip. Um, and he was working kind of in his free time with, uh, Logan green to kind of help build out this platform. But in 2008, it says Zimmer decided to leave his job at Lehman. I'm not sure if he decided. That might have been the fact that it was 2008. Who knows?

But he left to join what I think was called Zimride at the time to join full-time. And so they ended up building this into – and it was really like that car-sharing service between college campuses. It ended up being very successful. Well, there was thousands of users. It had received a little bit of private funding from Facebook, kind of a seed round. And then by 2012, I mean, it was a full-fledged platform. This was at the same time that kind of Uber was becoming more popularized. However, apparently they only had that long haul car sharing service and they said, we

thought it wasn't enough. We wanted to move to shorter rides, although Uber was around. So I figured they just kind of saw the opportunity and all the money that was flowing to Uber and said, we can do that too. Um, but within a few weeks, they built the app that would eventually become Lyft. This was just for shorter rides, shorter ride sharing. And at the time, any driver who joined the Lyft network would receive this big pink fuzzy mustache to put on the front of their car.

Instead of like the Lyft little sticker that you put on, it was this giant fuzzy mustache ended up being like fairly good marketing. Um, and the platform grew, grew pretty quickly. By the end of the year, they officially changed their name to Lyft. I think they sold Zimride to the owners of Enterprise Rental Cars. And then from there, the funding came quickly and it came heavily. In total, Lyft raised $4.9 billion in private funding over 28 funding rounds. 28 funding rounds, which is kind of insane to think about.

They then IPO'd in 2019. The stock is down 85% since its IPO price in 2019. And the market cap of the company today is below the amount of private funding they received over the years. Oh yeah. I'll pull up accumulated deficits. It's hard to say. Accumulated deficit as of the end of Q1, over 10 billion. So yeah, I'm a money loser, been a money loser forever. And as Ryan will get to later, still losing money. But I guess part of the, maybe the impetus for us wanting to do the show is Uber has turned the corner, or it depends what kind of numbers you use. It looks like it's turning the corner to profitability. Seems like the path is

certainly there. And so the idea is if Lyft can do that, there's potentially some serious upside to have here with the equity or the stock. And they've, I think, put the management team in place that should be able to do that. And so they're kind of in turnaround period right now is where they've gotten to. They just hired a new CEO. The founders have, you know, moved on, I guess, to executive chair. And they just hired a new CFO as well, but I'll let, I'll let you kind of take it. Yeah. We got to get the show moving. I'll get, I'll get to that. Let me do industry and competition. They opt in to, you know, operate in a disruptive, but very simple industry. Honestly, it's taxis and ride sharing. I mean, making it even more simple, they really operate

only in North America. So they're way more simple than Uber. We have to look at, okay, what's Uber's market share in Europe? How are they doing in certain South American countries? What's getting disrupted there? But Lyft, you're like, okay, I'm in Canada, North America. That's really it. And then also, unlike its main competitor, they're not doing food or retail delivery. So if we want to back into a market, say industry number, we'll use Lyft's 2022 revenue. we'll use a 20% take rate and then a just estimated 26% market share for Lyft. These are going to be roughly what it is because unfortunately for Lyft, they don't report their gross booking value. So when we're looking at the revenue, we actually can't calculate a

take rate, which is unfortunate. I wish they would give us that number. So we take those numbers. The ride sharing market in North America was around $78 billion in 2022. Here's the question i have as ryan is uh on technical difficulty here so he's back oh where is he i wonder what happened we might have to pause but let me just keep going the main competition is uber oh there he is he's back i'm good all right did you hear that yes heard it all okay what do you think uh well i heard it all didn't necessarily comprehend it because i was having those technical difficulties let me ask the question again do we think ride sharing gross bookings in north america will be significantly higher in five years i don't i don't know if i'd say

significantly higher i look at some of uber's unit volume and i kind of think how much of that how much that gross booking volume is coming from eats um well i mean you can look at you know they separate it out even the riders is growing i just wonder like how close are they really to yeah the the charity like everyone knows what uber and lyft are it's kind of just doesn't make sense and yeah can uber and lyft make it make sense outside of the city i could i wouldn't be surprised if in five years cumulatively you know ride sharing is 50 higher maybe in north american canada but i also wouldn't be surprised there's maybe only like 25 30 higher as well yeah well i could see them raising prices in tandem over the years and then

that drives gross booking value i just will active writers be double what it is today i just have a hard time kind of making that's possible yeah i agree with that um and then as we all know and i think listeners all know the main competition here is uber this is a duopoly market there's really no one else out there uber has an estimated according to different sources it's about 70 30 But according to the source for last month was 74% market share in North America for Uber, 26% for Lyft. I would just use that number kind of in your head if you're looking at this company. But over the long term, I think this is the one where maybe you're articulating a bull

case or maybe even part of the bear case. You could argue Lyft is more broadly competing with basically all forms of the ways people transport themselves around. So public transportation in certain cities, it was really strong. You got individual cars, you got rental cars, you got other vehicles. And you can also view it as ride sharing or these new forms of ways to get transportation versus the incumbents. And if you're really interested in learning about the competitive landscape, I would take

a look at Turo's S1. Look at the financials there. That car rental platform is growing quickly and Lyft really theirs is not. So that's an interesting competitor that's growing. It's the we economy. Yeah, it is. Yeah. I mean, we're really having a 2019 throwback here with Lyft and WeWork for the last part of July. Now, let me move us, probably keep going here to management ownership. This one, I think

I'll give some context here, but we're definitely going to be talking about this later in the episode, kind of our thoughts about this new management team. So they finally got the co-founders out of there, which I think was given the fact that they couldn't generate a profit, really a long time coming. And they brought David, I think it's Risher or Risher. It's R-I-S-H-E-R. Sorry if I'm mispronouncing it. I'm going to say Risher. He is taking over as CEO. If you've heard the story about him on either the media, the conference calls or whatever, they talk about it a lot because I think they're trying to hype up his narrative and his story and his credentials. He was a giant vice president at Microsoft, built a huge product for them. And then he left

Microsoft for an early position at Amazon and helped build their retail business in the early days. So his track record of building platforms and products is very strong and is likely what got him the position at Lyft, building these products that were kind of unprofitable and getting them to scale and to sustainable business models. He officially joined in April of 2023, so only a few months at the helm. So we really don't, you know, it's not much yet. He's kind of just said what his plan is, but we haven't obviously seen any results. There has been some executive turnover since he joins the team, which is not too surprising given that it is a turnaround story. The CFO, who was actually an Amazon exec before joining, who came there I think in like

right around the turn of 2021 versus 2022, has just left the company. And then some other people like the head of Rideshare, I think was fired. Currently, according to their IR page, they only have three executives. I think it's kind of a positive. It's better than I think the 15 we see at companies we study like Salesforce. They have Reischer, a president who has been with the company since 2012. So she's the one that's been there for a long time. I think she also used to be the general counsel. So she just became the president. I think she got a promotion from Reischer. And then a new CFO who just joined the business. So this is really a new team coming in. If we look at their compensation, we don't really need to go into the details because

a lot of stuff doesn't matter anymore because they're new executives, but they're heavily compensated with stock options and performance stock units. And this has really been a headwind to per share value creation because shares outstanding are up 33% cumulatively since going public in 2019. Lastly, I think the most interesting part here, which I want to discuss, is Risher's full performance-based stock unit package. I'll have it in the newsletter so people can look at it. But essentially, he has these tranches that if the stock price goes up by 50%, he'll get a million shares and then it goes up to 200%, 300%. He keeps hitting these tranches, he'll get more and more of these shares. Basically, if Lyft stock goes up by 8X

over the next five to 10 years, he will be gifted shares that will make him a billionaire. What do you think of that one, Ryan? Is this smart for this board to do that for him, to keep him around, keep him motivated? Yeah, man, I definitely prefer it to like what Elaine Paul, which was the previous CFO got, where they just granted her like a $16 million signing bonus in stock.

And then a year later. I think she has to forfeit some of that. I read that in the proxy statement, but still, I mean, still. Yeah, this is the right. If shareholders win, he wins. I do like this kind of alignment. And I know it can lead to maybe some promotional stuff, but he doesn't seem like a promotional kind of person. So I think this is a good program. And if he does well, it's going to benefit him and it's going to benefit everyone, really. Yeah, this is the one situation where I think this stuff kind of stuff works. I do like it. Well, it's not going to work, you know, guaranteed to work, but I think the alignment is good. Yeah, you're going to get a lot of dilution, but I think that's the point here. We're in a turnaround story.

You need to get a really strong executive in here and given his track record, if he can't do it, you know, maybe this business wasn't destined to be profitable in the first place. I will say on the ownership. Oh, go ahead. I mean, if this kind of program makes a lot of sense when you have a CEO coming in in a turnaround story, like you're not paying him a lot up front necessarily, you're paying him to fix this thing. I think Barry McCarthy probably got, I guess I haven't looked at the proxy for Peloton, but I believe he got kind of a similar package. Yeah, I wouldn't be surprised if you saw the media report that the Lyft CEO got paid this amount of money, right? Because they always use those. um but just to note if you see that it's performance stock units so it's not there's

not gifting him stuff one thing i will know until we get into the earnings is there are dual class shares here uh the founders have as you might expect the class b shares with the higher voting power but they do not have majority voting so logan green has 20 voting john zimmer has 12 voting so combined they're at about 32 voting power so this isn't controlled by the founders anymore. Honestly, I think that's a positive. Let's move to earnings. Ryan, they're pretty ugly. So what were the key numbers here? What do you think listeners need to understand? Yeah. I mean, so they're losing money is the thing to understand. And really to become an investor in this, I think you have to, I mean, as sad as it is to say, you have to kind of blindly

hope that they're just going to turn the corner to profitability somehow because they have not given out any long-term numbers. They've actually been very cautious to avoid giving out long-term numbers. So you're basically just hope you're kind of just, it's total guesswork in terms of what kind of profit margins they could get to potentially. So we'll talk about that in a little bit. I think that's part of my bull case, but $4.2 billion in trailing 12-month revenue, only 30 gross margin now that's not you want to do you want to say what we define as their gross margin or that's different it's so i mean the 4.2 billion is net of the fees paid to drivers already so the 30 gross margins is partially low because it's been a huge

insurance reserve build-up um and it's not i mean it's like just a strict gross margin you know all the payments processing costs a lot of the yeah we add we add operations and support the least uh into that as well but they don't so they'll they'll say a different number but operations and support is kind of cheating i think because it's going to scale with your business it's variable yeah unless ai changes the support cost but we'll say maybe uh anyway they lose about a billion and a half dollars, or they have lost a billion and a half over the last 12 months. So negative 30% operating margins, obviously not sustainable. However, they are starting to get a little better. So revenue is still growing right now. The most recent quarter

grew 14%. They had $188 million in net losses. And basically they're spending $180 million on stock-based compensation. So if you didn't have the insurance reserve buildup, they would be breakeven operating cash flow. Now, the stock-based compensation is a real expense, so they are losing money. But they had the buildup of insurance reserves, which led to a $74 million operating cash burn. Preston Pyshko I think you're getting it backwards, I got to say. Preston Pyshko Am I? Preston Pyshko They're building up. They built up in 2022,

because, yeah, I kind of looked at that. They built up a cost on that, the reserves in 2022, and that was an add back of $350 million in 2022. It was a cost they had on the income statement, but they added back as a non-cash expense. But they had, I guess, a reversal. I don't know what they did, but they had a cash outflow from that part in Q1. So it was a negative hit in Q1, but I'm not sure exactly how they defined it. But still, like we said earlier, the insurance costs aren't some fake depreciation number that's overstated. They're going to be most likely paid out because usually insurance companies are pretty darn good with this yeah i think you're right i'm just trying to piece together what i'm missing here yeah it's hard it's hard

to do it on the fly but i think yeah like when they reserve it it's non-cash but q1 they actually had a reversal that i i forget how the definition is but it was a cash uh it was a cash hit that wasn't an expense in Q1. Okay. Yeah. So cash insurance reserves declined, I guess, quarter over quarter. And so that's what's leading to this. It's hard to do in your head because you have to go flip-flop back and forth, but yeah. They aren't profitable, really. Even if you add back all the stock-based comp and normalize insurance, they're losing money. So I guess that's the important takeaway here. Sorry, I should have provided maybe a little more value there and looked a little deeper. But if we look at the qualitative stuff, or I guess it's still

quantitative, but active riders grew 10%. What we're seeing here is that management is focused on bringing down price. They talk about this being more competitive on pricing, pricing parity, because for the last two years, I guess, they've had higher prices than Uber. This should increase active riders. And they reported actually having their first quarter of market share improvement in the last two years because they took down prices. So that's a positive, but it's going to hurt contribution margin because you don't necessarily want to pay your drivers less, especially in an inflationary environment. So their take is going to lower and they're going to have lower contribution margin. On the stock-based compensation,

which looks pretty egregious because they spent $750 million on stock-based comp in 2022, the CFO did address this pretty clearly at a recent conference. She said, this might've been the first quarter conference call. She said, our stock-based compensation costs will be roughly 550 million in 2023 and 350 million in 2024 down from 750 million in 2022. I'd like to see it happen first, but it's certainly going in the right direction. And that's a big improvement. And they said they've had just structural changes to their compensation plans. So they're just not giving out as much stock to employees, which I think is certainly a positive here. And then they also just did a pretty big round of layoffs, which should help, but it's going to take some

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So 1.75 billion in cash and short-term investments, plus another 830 million restricted investments. Most of that is longer-term debt securities, although they have invested in sort of other, they've, you know, like all the ride-sharing companies like bought each other at one point. So I would keep the, yeah, the investments that are the equity funding. i always think like yeah that's probably worth zero for this this sector yeah and but the restricted stuff i think is part of the insurance thing i couldn't get really any good info for the annual reporter 10q so i'm interested what it was but it said it had something to do the restricted stuff was because it was related to the insurance part so i i would i don't know i kind of excluded

it from the enterprise value right wouldn't that be the safest way to do it i think it depends so yeah probably i feel yeah um they've got about 800 million dollars in long-term debt so about twice as much in cash as they do in long-term debt although all that debt is convertible senior notes pretty much i think like 90 plus and it's i mean they did a good job raising this money it's senior convertible senior notes due in 2025 they pay 1.5 interest a low interest rate the conversion price i believe check here i think it was like 39 i'm double checking real quick just a quick 4x from here yeah i mean the stock's at like 12 a share right now so it's a ways away um yeah okay it's 38 39 cents per share due in 2025 so unless the stock

doubles or triples from here. They're going to be paying that off or maybe rolling it in some way, but it's unlikely to lead to dilution from what I understand. And they get a lot of cash, so they should be fine as long as they don't just burn a ton over the next couple of years. Yeah. I mean, I was going to say they've done a good job managing their balance sheet in that they raised low interest debt, but they didn't do a good job managing their balance sheet. They just got $5 billion in free funding from private markets. And a fat IPO. Yeah.

So it's pretty easy, I think, to kind of have as much cash as they do. And they earn basically $120 million in annualized interest income because they have so much cash held right now. So, I mean, the balance sheet's definitely a bright spot for them and it gives them a lot of room to run, even if they do continue to kind of burn through cash right now. Yep. The problem is not the balance sheet. it is definitely the income statement. All right. I'm going to devaluation. I'll say as a reference here, we do not going to talk about a bunch of charts here, but in the newsletter, there will be charts that help you understand the trajectory, the financial trajectory of this company and

where it's training at today. So again, if you want more understanding on that, because we try not to hit too many numbers outside of kind of the earnings and balance sheet in these episodes, make sure to subscribe to that. I'm going to keep it simple here because we will go through some more projection on some sort of financial estimates or anything in the bull and bear case. But today, the market has $4.6 billion, or actually $4.7 billion as it updates. Subtract out that net debt or really that net cash position, and they have an enterprise value of $3.7 billion, so pretty cheap. Although, since they're burning cash, I don't know whether to say truly that the net cash is available to shareholders, but let's just pretend it is.

We use that and we use our classic, which we will use for Pinterest because it's unprofitable or really not that profitable, is the EV to gross profit, enterprise value divided by gross profit. And again, we're using kind of a more aggressive one or maybe conservative, however you... I guess management would say this would be aggressive, but we're taking out all their cost of revenue and then operations and support as well. They're trading at an EV to gross profit of 3.1. So if they fix these operating expenses, I mean, the stock is not expensive, but the thing is they got a lot to fix on the operating expense line, which we'll hit to later, but let's move to anecdotal evidence, kind of more of the qualitative stuff. Ryan, what do you have here? I mean,

we all got it. We all, everyone has a take on Uber and Lyft every, everyone, you know, right. Everyone he talked to. Yeah. And, um, sorry, I was trying to go through some of the financials to figure out that insurance stuff, but it might take me a little longer. The, um, when it comes to anecdotal evidence, I've used both whenever I was looking for a ride, it was typically I would price compare. So I typically check Uber and then I check Lyft. And for the last two years, it's always been that Lyft seemed to have higher prices. And so I just kind of gave up checking Lyft, which maybe a lot of people probably still check both, but I've gotten to the point where I kind of just check Uber and then I pay the rate because it doesn't seem like Lyft is going to

have a lower price. And I think that's why management has talked about, okay, we'd lower prices now we have to do a whole bunch of marketing to tell people that we lower prices because maybe people stop checking and so i think this is why the head of rideshare was fired because it was probably a very not smart move yeah it uh i mean and now i'll probably check just because i like read the conference calls and saw that they're going to do this but that's not very many people are not going to do that yeah yeah i uh yeah i'm in the same boat like I'll check Uber first. I feel like I check both a lot, but sometimes if you go,

I think this is why Uber has more market shares. You check Uber first and it's not that expensive and it says close by, then you'll just take it, right? If it's not too expensive. Yeah. All right. Future growth opportunities. This is a tough one because they're all about streamlining, you know,

the business. So Uber, you can have an infinite amount of future growth opportunities because they want to be the everything app for transportation and delivery but lyft is kind of the opposite where it's just transportation only and none of the adjacent stuff so ryan what do you think i said dispose of their scooters and bikes business um at least the scooters at least scooters i mean god yeah it just seems like the depreciation has got to be insane on those and people just treat them like crap,

which is probably why I think the depreciation has got to be crazy. I just can't imagine that those are profitable. And I guess there's one of the companies is public and they just like aren't profitable, right? Yeah, let me, I think it's Burt. Lime may be, I should know this as a part of, well, it's up recently,

which you shouldn't be surprised about. It's up 11% today, But over the last year, it is down 70%. I think it was a SPAC and it's at $1.70. So yeah, down 93% over the last five years or since going public in 2021. It's just, okay. So at this recent conference, Doug Anmuth, which is the, I think the JP Morgan analyst who seems to be on like every conference call somehow, he did this word association exercise

with david resher or resher and he said he would like say a word he'd be like ride sharing or like uh competition or something like that and he'd have resher respond with one word and he said bikes and scooters and resher responded love it as a customer working on it as a business at this point in the company's life cycle if it's something you got to work on it's probably not worth having i would think unless you think for sure that you can get to profitability and i just don't see how that would happen here yeah or change the model something like i mean it's kind of related to my future growth opportunity i mentioned that the future growth opportunity that they always talk about is streamlining operations and look he says richard does seem

like if you're looking at this business you can't be like wishing stuff like and you gotta look at what they're actually saying and what they're going to do and think if it's smart and he says that there's a big opportunity getting electric bikes you know what they call the e-bike stuff. I mean, I guess that is true. It's a huge trend. It's growing really rapidly among people buying it and stuff like that. So if they can solve the depreciation problem with this thing and change the business model with e-bikes, I don't know how they would do it. Maybe they would do it as rentals. Maybe they would do it through partnerships. I'm not so sure. But if they can solve the problem there, there's going to be demand for those e-bikes

because that's definitely something that people want. But the problem is, is there a business model that works? It's hard to see how there would be because so many companies went after it. No one could figure it out. Now they're all losing money or just luckily got absorbed by Lyft or Uber. Yeah, those all felt like pretty bad businesses.

And it's one of those things that you can just look at and see how they treat how people treat the equipment and it's like someone is just funding drunk people throwing these things into bushes like yeah if you've been crashing on them i mean there's got to be big insurance costs for for lift yeah if you've been to a sporting event and seen a bunch of dudes group of dudes come out of the stadium you know that these are bad businesses you know for a fact they're bad businesses i mean i've seen i don't know what it is when people see these scooters they just go i want to kick it like i think it's because they're just in the middle of the sidewalk and people get annoyed too but let's keep moving highlights on the

lights as we get to wrapping things up ryan what'd you like dislike about this business in terms of i guess highlights for me they they people know what it is that must have some value millions of people still ride with lyft millions of people still check the app so if lyft does do something to kind of reinvent themselves or differentiate themselves it should get noticed cut 80 of the employees yeah or i mean if they if they lower prices too like it should get noticed um which means that they have that lever to kind of pull in terms of driving volume i hope um they also have a lot of cash in the balance sheet they have which gives them some time to figure things out. David Risher seems honest. He has good incentives.

Seems like if there's someone that can turn this thing around and be him. Lowlights for me though, is I would not want to be him. I mean, this is a business. Playing second fiddle to Uber here, if you raise prices, you lose volume. If you lower prices, maybe you raise volume. I don't think that's entirely clear, but your contribution margin shrinks and you have to cut across the entire company to make up for it. So it's just hard for me to imagine them generating a healthy amount of profits every year. I don't think Uber has any incentive to kill them because it's better functioning as a duopoly. They'll have less government scrutiny but they could like if they just lowered prices for a while

lyft would just be in burn mode yeah i mean they could survive longer for sure um yeah i don't know it just feels like a really tough tough business to run yeah and i think the thing people get excited with risher is that you would have said the same thing about amazon at a sub a hundred million dollars in revenue and he turned it into a profitable business so it doesn't that doesn't guarantee like just because he succeeded there and doesn't mean he's gonna succeed here i would say my highlights i mean i have the same kind of as you anything else i think the competitive set in the united states for ride sharing is set so i think that's a huge positive you're gonna have 70 30 here for bookings give or take depending on how aggressive

or less aggressive to get on pricing. And I would think the market sees steady growth this decade. I believe some analysts are a little bullish on ride-sharing growth, depending on how the pricing power is here. But I still think it could see steady growth for sure. I mean, there's still a lot of taxis. There's still a lot of room to run here. Also, there was that interview with Dara Kostner-Rawahi, I think is how I'm saying that, right? Yeah, that's pretty bad, but everyone knows Dara, the CEO of Uber. the ceo of uber and he did say there was a point when like um the host of the podcast it's the acquired uh said like you guys basically run a monopoly now and he said he like stopped and was

like i think people don't appreciate how much market share lyft really has yeah i mean 25 to 30 that's not nothing people probably think it's like 10 yeah i mean people i haven't used lyft in long time so i think people just kind of associate it with like their personal habits probably they they said they were 50 they had 50 market share in portland so shout out portland i gotta say that was the least surprising thing i read for this whole thing as a seattle portland rivalry a little dig there but other lowlights i want to hit on this too i think it's important is the autonomous vehicle risk i think it's less more of a risk as ryan mentioned earlier and kind of teased way more risk than a potential you got waymo and google growing like mad feels like that's

underrated but as we wrap up we got about six minutes left as we got another recording to get to let's go through bull and bear case ryan what do you think well okay bulk case let's use uber as a comp so uber reports that it has 25 segment adjusted ebitda margins in its mobility segment Now, that is not anywhere near real margins if it were running it solely as the mobility business because there's like overhead, there's corporate costs, general corporate costs. Those are fake, dude. That's all going to be AI soon. Yeah.

So, I mean, real profit margins are not 25% for the segment, but let's say, or just assume or guess that they're doing 25, or sorry, 10% real EBIT margins. If you think Lyft can get to half of that, because I imagine there's some operating leverage here and it certainly benefits to be the one with 100 million active writers instead of 19 million, let's say they can get to 5% EBIT margins. They'd be generating probably around $300 million in net income a year because keep in mind they have all the cash on the balance sheet, so they're earning interest income as well. today they have an enterprise value of 3.9 billion so trading a low teens theoretical earnings multiple now like i said earlier i have no no way to truly gauge how much margins they could be generating but if they got to that kind of level it's easy to see how this could be a good investment especially if the business continues to grow because those numbers are based on current

revenue figures, which Lyft has grown over the years and I expect it will probably continue to do so. But I don't know how they get there. Yeah. I think my bold case is like, look, 70-30 market share and they kind of react to Uber's prices. It seems like now they're getting back to that, which is kind of a tough spot. But if Uber starts raising prices as they have, Lyft can react and raise prices and that can be a benefit. You got a rising tide with the entire industry. And if you combine that with gutting the employee base, which again, we're taking this in an investing lens here. We don't want that to happen to people, but the business has to be run profitably and they have way, way too many employees. You could see a profit coming in

with $1.2 billion in gross profit in 2022. I mean, yeah, there's room for this to happen. It just is going to be threading the needle on both the revenue side and the cost side. Now, let's move to bear case as we wrap things up. Ryan, it seems like you got a simple one. I got some numbers that I think will illustrate anyone that's kind of bullish on Lyft. I think it gave me some pause as someone that was like, dang, this looks pretty cheap, you know, but again, you go ahead first, Ryan. Yeah, I think the bear case is that they kind of just tread water for a long time.

They've got plenty of cash on the balance sheet, so they could just be, maybe they improve a little bit in terms of margins, but I don't see them being, there's no scenario for me where they're more profitable than Uber. They got to be innovative. They got to be innovative. I mean, that's right. It's so hard to differentiate though. Like what can Lyft really do that makes them a better service than Uber? We'll see. uh yeah i mean i'm with you there but we'll see i think that's honestly been some of their pitch

right when reading their conference calls is like they're saying look we're going to change this thing and i guess you got to trust them but it's really hard to trust i know but like just bundling scooters doesn't do that you know and i tend to agree but hey time will tell time will tell i think i think the risk is that they just basically kind of burn money for a while maybe burn less money but you know you never really get to true like profitability yeah all right i'm gonna give some numbers here so i'm gonna put some of these charts and different estimates in the earnings report because i did give out a lot of numbers and i think it's pretty simple to go through how they get to profitability so here's the numbers if they keep gross margins

steady at 30 which again is including operations and support so i'm assuming nothing expands here you could assume it expands. I'm assuming it's staying at 30%. If they grow revenue at 25% average for the next three years, they're not going to grow that this year. So say an average for the next three years, they keep operating expenses flat after taking out the $330 million hit for severance this year, which is what they estimated for. If they do all these three things, 30% margin, 25% revenue growth for three years, keep expenses flat after cutting about i don't know what it was 10 of the employees they will be break even in 2025. so they got a lot it's an up it's an uphill climb i think we're going to close things out because

we're ready at a time we're both less interested in it here i think it's pretty clear uh going throughout the episode but ryan any final thoughts before i do the disclosure no i mean it's just a a business that has to like reacquire customers over and over again. Like there's no customer loyalty here. So it's really hard to be like consistently profitable. Both customers, drivers and riders. Yep. Yeah. All right. That's going to do it. Thank you all for listening. I hope this was a very insightful episode. If anyone has any questions that's interested in this one on the insurance

reserves, we're going to look into it after the newsletter. So we'll probably put a note in there and how it actually works. Next week, we're covering WeWork. We are not financial advisors. anything we say on the show is not formal advice or recommendation. We are general partners at Arch Capital and clients may hold securities discussed in this podcast. Thank you all for listening. We'll see you next week. Do you wish you could just hit skip on the worst parts of your life. You know, the same way you can skip an ad. I get it. I'm Siaya and I live in Ice Cove. I've made some questionable decisions that didn't end up the way I planned. And today I'm still figuring it out. Somehow things usually get worse before they get better. Apparently that's how I

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