As Lyft gears up for its IPO expected at some point this year, reports already suggest that it is oversubscribed on investor commitments, a positive sign for the company which should allow it to exceed the expected $20-25bn valuation.  Releasing its S-1 is part of that process, and allows outsiders their first glimpse at what is under the hood, so to speak.

The basics all seem pretty impressive and what you might expect from a tech startup that has emerged as one of the major ‘unicorn’ success stories of the last five years. Revenue surpassed $2.16bn for 2018, doubling that of $1.06bn in 2017. The number of active riders (defined as a rider who took at least one trip during the quarter) hit 18.6mn, while the number of rides reached 178.4mn, both indicators increasing by around 50% year-on-year. Gross bookings surpassed $8bn, up by 75%.

The standard net losses that one might expect from being a fast-growing, tech startup in an emerging industry are also prevalent. These losses reached -$911mn in 2018, widening from -$688mn as cost of revenues increased in line with acquiring new riders.  With competition for market share and the need to continue its aggressive expansion still a key part of strategy, it seems highly unlikely that Lyft will be profitable anytime soon.

That may or may not matter in the grand scheme of things and certainly is of no immediate concern for the investors who are oversubscribed on its offering. Lyft has introduced its own metrics called Contribution and Contribution Margin as a means of saying, “if we weren’t expanding rapidly, here’s what our profitability might resemble.”  For that reason, its a meaningless metric for the forseeable future.

Two Long-Term Risks In Its Strategy

Unlike its rival Uber, Lyft will represent a pure-play ridesharing company. Uber has since expanded into food delivery (Uber Eats) and freight hauling, and has a massive presence across the globe. While I think the lack of revenue diversification is not an issue at this point, I am concerned that Lyft has boxed itself into a US-only company. It has expanded into a few areas in Canada, but even then, this will serve as a serious cap to its growth potential.

Lyft has reportedly opened an office in Munich, Germany as of January 2019, and there are indications that it will continue to expand internationally. However, on Uber’s website it reports that it is already in 461 cities outside of North America, spanning all continents and in many cases, has had a presence, brand awareness and customer base for many years. This will cause issues for Lyft if and when it decides to take on Uber around the world, especially if you believe that Uber’s worst days of scandals and a damaged reputation are behind it. That gives Lyft very little leeway to break through in established Uber markets other than competing aggressively on price.

Ultimately, Lyft may decide that its  future is as a North American company only, with a sizeable customer base to target and a slice of the transportation expenditure of $1.7trn in 2017 to capture. However, quarterly growth rates in riders have been slowing and dropped below double-digits for the first in Q418, to 6.9% compared to Q318. Growth rate in the number of rides has also fallen, hitting 10% in the same quarter, whereas these rates averaged over 20% during 2016-2017. This will force it to look outside North America, sooner rather than later, to compete for new riders and not just trying to take share from Uber in the US.

If it doesn’t, its lack of international presence will inevitably hurt the company in its domestic market, as customers will be forced to use Lyft’s competitors whenever they travel outside of the US. This is also the case for those travelling to the US, who might already have been using Uber for years and have never heard of Lyft and see no reason to download a new app for the purposes of a vacation or business meeting. This cohort of international tourists and business people are likely to be among the highest spenders for transportation and on services such as Uber and Lyft, simply as a result of them having to travel. Giving up the vast majority of this consumer group will inevitably hurt Lyft back in the US too.

Investors will no doubt hope that Lyft will turn profitable one day, but if it plans on international expansion, that date is a long way off, if ever. Lyft’s costs and expenses continue to rise a rapid rate, fueled mostly by cost of revenue, which primarily consists of insurance costs required by city regulations for ridesharing, as well as payment processing charges. Cost of revenue came in at $1.2bn in 2018, nearly doubling from $660mn in 2017.

The other major expense was in sales and marketing, which hit $800mn in 2018, an increase of around 42% and $250mn year-on-year. There is scope going forward for marketing and related expenses to slow in the US, as Lyft reported that in the fourth quarter of 2018, approximately 80% of new Active Riders downloaded the Lyft app organically. Again though, this spending will need to be ramped up significantly if it intends to compete internationally, building a brand in new markets and encouraging users to switch from taxis and rival ridesharing apps to one they might not have heard of.

The key will then be to offset this higher spending with more revenues coming in and a higher take rate from bookings. Revenues as a percentage of bookings, the amount riders pay, reached 26.8% in 2018, marking an improvement from 23.1% in 2017 and 18% in 2016. This is higher than the 22.6% that Uber has reported, and its unclear how much higher this number can go without drivers defecting.

Short-Term, These Risks Don’t Matter

Still, these highlighted risks and others such as autonomous vehicles, are not at the front of the minds of those involved with the IPO. Other metrics such as revenue per active rider, which has risen from $15.88 in Q116 to $36.04 in Q418 point to the expectation for stronger growth over the next few years. Revenue growth in yearly terms also proves to be impressive, up by 94.3% year-on-year in Q418 to $670mn compared to $345mn in Q417. No one cares about profitability at the moment but it will be the company’s prerogative to prove that