Focusing solely on Lyft’s losses misses the point
March 25, 2019 | Blog

Focusing solely on Lyft’s losses misses the point

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.

Losses, yes, but also considerable growth

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.

Media overcompensating for dot com bust?

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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Thomas Lee

Thomas Lee

Thomas Lee is the Senior Writer at SharesPost. He was previously a business columnist at the San Francisco Chronicle. Lee has written for the Star Tribune in Minneapolis, St. Louis Post-Dispatch, and Seattle Times. He is author of “Rebuilding Empires” (St. Martin's Press), his book on the future of big box retail in the digital age.
PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.