Is Lyft The Next Blockbuster or Blockbuster Video?
Michael E. McGrath
Originally published in Seeking Alpha on Mar. 21, 2019
Summary
Eventually, Lyft's ridesharing business will be replaced by autonomous ride services (ARS).
The economic and pricing advantages of ARS are far superior.
A capital and technology-intensive business model always replaces a labor-intensive model.
Investors in Lyft are ultimately investing in its long-term prospects in autonomous ride services.
Yet its ARS strategy has many open questions.
With Lyft's (NASDAQ:LYFT) IPO, there is increased attention on the rapidly growing ride-sharing business, even though it is unprofitable. The fundamental issue facing Lyft, as well as Uber (NYSE:UBER), is how will it compete against or use autonomous ride services. Will it become a blockbuster in this new industry or displaced by new technology, just as Blockbuster Video was?
Blockbuster Video was a hot stock to own in the 1990s with rapid growth, reaching almost $6 billion in revenue in 2003. Netflix (NASDAQ:NFLX) began competing using its mail-based subscription model and then introduced streaming video in 2007. Blockbuster could not compete with streaming video, and it filed for bankruptcy in 2010.
In my previous Seeking Alpha articles, I explained the advantages of autonomous ride services (essentially Uber or Lyft without a driver) over ridesharing. Here we will look at the implications on Lyft and its ARS strategy, but first, let's review an updated business model comparison that was introduced in a previous article - Uber Must Have Autonomous Ride Services.
Comparison of Business Models
A business model defines the fundamental way a business works in economic or financial terms. It is a basic element of strategy. A business model is not intended to be precise; it’s directionally correct. It’s not a financial projection, even though it frequently appears as one. It uses financial projections to illustrate directionally how the business works. Let’s compare the business models for ridesharing and autonomous ride services, modeling them on the income and costs for a typical trip.
The business model projected for ridesharing starts with data from Lyft and Uber and then projects some improvements. It uses revenue and cost for a 7-mile trip, which from many estimates is a typical Lyft or Uber trip. The price per-trip varies widely based on the time of the day, drive time, and distance. However, a 7-mile trip for $16.00 (approximately $2.30 per mile) is reasonably representative of a typical Lyft or Uber trip.
The driver cost uses the percentages from Lyft’s and Uber's recent revenue statements. For example, Lyft reported $8.1 billion in bookings with a $5.9 billion or 73.4% driver cost in its S-1. Of Uber’s $12 billion in quarterly billings, $9.2 billion (approximately 76%) went to its drivers and related expenses. The remainder of the ridesharing cost estimates comes directly from the percentages in their respective financial statements. They classify operating expenses somewhat differently, so the total operating expense is the best comparison. Using these ratios, both Lyft and Uber report losses on every trip, just as they do overall in their financial statements.
The ridesharing projected model averages the driver cost between the two services. It also assumes operating expense improvements with increased economies of scale. It also assumes a significant reduction in R&D costs since much of the current R&D is going toward developing autonomous vehicles. With these projections, ridesharing is approximately breakeven.
In the modeling for ARS, I use an average of $1.35 per mile, so that the 7-mile trip will be $9.45. This is approximately 40% less than a comparable ridesharing price for the same trip. ARS pricing will vary too. Initially, it may be closer to ridesharing pricing since it will be capacity constrained, but when ARS competitors have local fleets of 1,000 or more vehicles then prices will be reduced.
The overhead costs for the ARS model include similar operations costs and R&D (which would be about $3 billion per year allocated across all ARS vehicles). The end result in this model is an operating income estimate of 25%.
The ARS business model is significantly more profitable, even at a much lower price per trip. There are no driver related costs in the ARS model since there are no drivers. Instead, there are significant capital costs from investment in autonomous ride services vehicles. In my research, I estimate that a typical ARS vehicle will make 50 trips per day (Waymo uses the same estimate), for 350-days-per-year, with a 7-mile per trip average. Each vehicle will generate approximately $150,000 per year in revenue. I estimate the operating cost per vehicle at over $52,000 per year. This includes fuel, insurance, taxes, maintenance and cleaning ($20,000/year), and depreciation ($20,000/year). This would yield a 60% return on investment for a $100,000 ARS vehicle.
Readers of some of my previous articles were skeptical of the 50 trips per day assumption for autonomous ride services, so I also included a much lower 30 trip per day projection. This still shows a much more competitive and profitable model than ridesharing with an operating profit of 22% but a lower, although still viable, return on investment of 34%.
ARS could charge a higher price per trip and be even more profitable. Competition for ARS could force the price per trip even lower, but this lower price will most likely expand the market even faster and increase vehicle utilization. I modeled a lower cost-per-trip of $6, which is 65% less than the price of an Uber trip. At this price point, assuming somewhat higher demand and utilization, the ARS model is still profitable.
ARS Will Displace Ridesharing
The fundamental strategic difference in these business models is the well-proven examples throughout history; technology and capital-intensive business models displace labor-intensive business models. When this happens, the labor-intensive model loses every time.
At almost half the price per trip, ARS is much more profitable. Ridesharing is not yet profitable, and it cannot hope to be viable at these lower competitive prices. ARS will eventually displace ridesharing. One can argue about the timeframe for this. Is it going to start in two years or four years? Will ARS take 20% of the ridesharing market by 2025 or 50% of it? Regardless of timeframe, the conclusion is inevitable: ARS will eventually displace ridesharing.
ARS Competitors
Autonomous ride services will become a very large market. Ridesharing is currently a large market and growing rapidly. ARS will displace ridesharing over time and also accelerate the market because of much lower prices per trip.
ARS will be a geographic market, not a global market. It is a services market, not a product market. Approximately half-a-dozen major companies are expected to compete for that market in the U.S., rolling out their ARS services by metropolitan areas. Waymo, a subsidiary of Google (NASDAQ:GOOG) (NASDAQ:GOOGL), is the first to market. Cruise Automation (GM) is expected to follow in 2019. Ford Autonomous Vehicles LLC (F) is planning on launching its ARS services in 2021. ARS is crucial for Uber and Lyft because it will cannibalize their ridesharing business. They need to compete in this market or eventually face extinction, but they are both behind in developing autonomous vehicles. Apple (NASDAQ:AAPL), is the wildcard in the ARS market. It has yet to declare its intentions, but it is investing heavily in AV development and testing, and the ARS market is the only one that makes sense for it.
The advantage that Lyft and Uber may have in entering the ARS market is that they already have popular ridesharing apps. They can simply add an ARS service to their apps and riders can choose what they want. Others will need to get customers to use their apps to request a ride, but that may not be a substantial problem when ARS comes into a metropolitan area. The Uber and Lyft brands name may be an advantage, but it's hard to rely on a brand name as a differentiator.
Lyft’s Autonomous Rides Services Strategy
Lyft is investing in developing autonomous vehicles, but not as much as Uber, Waymo, Apple, Cruise Automation or Ford. Its strategy appears to rely on the technology development of others. Lyft's strategy is focused on building a network of partnerships. Lyft describes its two-pronged autonomous vehicle strategy in its S-1 as follows:
Pioneering Autonomous Vehicle Strategy. We are investing in autonomous technology and employ a two-pronged strategy to bring autonomous vehicles to market. Our Open Platform provides market-leading developers of autonomous vehicle technology access to our network to enable their vehicles to fulfill rides on our platform. Simultaneously, we are building our own world-class autonomous vehicle system at our Level 5 Engineering Center, with the goal of ensuring access to affordable and reliable autonomous technology. We believe that the strength of our brand, our trusted relationships with riders and our expertise in operating a ridesharing network at scale, as well as our two-pronged strategy to bring autonomous vehicles to market, will be competitive advantages that will enable us to capture value in the emerging autonomous vehicle ecosystem.
Lyft has several strategic partnerships that may offer access to autonomous vehicles. Its Open Platform partnership with Aptiv has enabled the commercial deployment of a small fleet of autonomous vehicles on its platform in Las Vegas.
The success of Lyft’s strategy of partnering with others providing the autonomous vehicles for ARS is risky. This strategy relies on partners that have invested billions in developing autonomous driving technology, giving Lyft control over riders and letting Lyft take a significant portion of the ARS rider fees. A few years ago, this seemed like a good strategy, and there were many partnerships, but then these companies realized that control of the autonomous ride services platform would dictate who made money. So, then they went off to develop their own ride services. Waymo decided to have its own platform, Waymo One. Then Ford and GM spun off their own ARS businesses.
It seems like this may not be evolving as Lyft intended. So, Lyft was forced to increase its own AV development investment. Lyft appears to acknowledge the inevitability of autonomous ride services and discloses the problem of not having an AV partner as a risk.
If we are unable to efficiently develop our own autonomous vehicle technologies or develop partnerships with other companies to offer autonomous vehicle technologies on our platform in a timely manner, our business, financial condition and results of operations could be adversely affected.
With its IPO, Lyft will have the financial resources to last for years even with continuing losses in ridesharing. It won't have sufficient financial resources to develop and launch autonomous ride services. It could possibly acquire a small company to accelerate its autonomous vehicle development, but it won't have the immense capital required to create autonomous fleets for ARS.
I previously saw Lyft as a potential acquisition candidate, but at the expected valuation, this is less likely. It will be a little bit like someone buying a mansion on the ocean and then tearing it down to build another house. It's not rational but could happen. It will be too expensive for GM and Ford to acquire Lyft. Google could acquire it to combine with Waymo, but may not need to do that. In any case, Lyft's voting structure will discourage potential acquirers.
Conclusion
So, the fundamental questions for investors in Lyft revolve around its strategy for autonomous ride services. Just like streaming video displaced video rental, ARS will replace ridesharing. Investing in Lyft should really be done as an investment in its longer-term strategy for autonomous ride services compared to its expected competitors.