Lyft has been one of the most anticipated IPOs in recent memory and not just because of its potentially promising financial prospects. The company, along with rival Uber, transformed the U.S. economy by ushering in the era of on demand services and that of unicorns, private tech firms worth at least $1 billion.
But when Lyft finally filed its IPO papers earlier this month and disclosed financial data, several major news outlets offered less than flattering headlines.
“Lyft’s IPO Filing Reveals Nearly $1 Billion in Losses,” the New York Times said.
“Lyft IPO Shows Growing Losses at Ridesharing Company,” Barron’s said.
“Lyft is losing a lot of money. And it might not turn a profit until 2023,” CNN said.
And here’s my personal favorite:
“Lyft warns it might never make money,” Quartz said. (Such a phrase is actually pretty standard language in a S-1 as no company can guarantee it will turn a profit.)
None of these headlines are inaccurate. But they are misleading because they lack crucial context.
First and foremost, tech firms are likely to generate big losses when they go public because they are focusing on rapid growth, not profits.
Netflix and Amazon, two highly successful companies, both lost considerable money prior to the IPO. Unicorns that have gone public in recent years, including Spotify, Dropbox, and Xiaomi, were deep in the red they filed their registration papers.
Lyft’s losses are considerable: $911.3 million is not a small number.
But Lyft is also growing revenue fast. Very fast. The company generated nearly $2.2 billion last year, compared to $343.3 million in 2016. That represents a compound annual growth rate (CAGR) of 151 percent in just three years.
Thanks to record breaking amounts of private capital, unicorns in general have experienced unprecedented sales growth. From 2013 to 2017, Uber’s revenue jumped from $104 million to $7.04 billion. Airbnb saw its revenue increase from $250 million to $2.6 billion. By comparison, Facebook generated half of Uber’s revenue when the social media giant filed for an IPO in 2011. Google never crossed the $1 billion mark before it went public.
The real question is not necessarily how much Lyft is losing now but rather when it will translate its growth into profits.
It took Amazon 7 years after going public before it turned a profit. And that’s Amazon, one of the most successful companies in the world today. Wall Street might not offer the same patience to Lyft or Uber that it granted Amazon.
But Lyft has controlled costs better than we expected. The company generated CAGR revenue 151 percent over the past two years but CAGR costs grew just 16 percent over the same period.
That Lyft has been able to grow revenue faster than it loses money is noteworthy. For one thing, Lyft has been much less aggressive than rival Uber in growing and diversifying the top line. Lyft has not ventured into freight and food delivery, which has been a strong business for Uber. While Uber is looking to grow overseas, Lyft has been content with the United States and few locations in Canada.
The news media’s fixation on Lyft’s losses is ironic, given its previous roles in hyping high-tech companies on less solid footing than Lyft. Academics have blamed journalists to a certain degree for stoking the bubble that led to the dot.com crash in the early 2000s.
“The stock price increase was driven by irrational euphoria among individual investors, fed by an emphatic media, which maximize TV ratings and catered to investor demand for pseudo-news,” Robert Shiller, a Nobel Prize-winning economist at Yale University, wrote in his seminal book “Irrational Exuberance.”
Back then, losses hardly mattered, if at all. I should know because I was a business reporter at the Seattle Times, where many of these young Internet startups called home.
Companies had successfully persuaded journalists (and many investors) to focus on pro-forma earnings, or what firms would have made had they existed the year prior.
Today, pro-forma earnings are not compliant with Generally Accepted Accounting Principles (GAAP) companies use to calculate financial performance. There’s a reason for that.
At least with today’s tech companies, losses are reported as losses.
Hindsight is, of course, 50/50. But at the very least, journalists were not sufficiently skeptical on firms like Pets.com and Webvan. Or companies like Enron and WorldCom in the immediate years after the crash.
Perhaps that’s why the news media has focused so heavily on Lyft’s losses. But reporting on losses in a bubble so to speak is hardly an improvement in financial analysis.
So far, it doesn’t appear those headlines have scared off investors as Lyft’s IPO is already oversubscribed.
But with a prominent group of unicorns, including Uber, Pinterest, and Slack, poised to go public this year, journalists should take the time to provide critical but also contextual reporting on these companies and their IPOs.
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