Lyft (NASDAQ:LYFT) is having a rough start as a public company. Since its initial public offering in March, the LYFT stock price has been nearly cut in half. One dark cloud hanging over the company is the Gig Work Bill (AB5) that California’s state assembly passed in May. If Lyft and other ride-hailing companies are not given exemptions, then a cost structure that was a major benefit will fundamentally alter Lyft’s path to profitability.
But Lyft stock faces other obstacles as well. And the problem for investors is that none of these problems come with easy solutions. Let’s take a closer look at three of these obstacles.
Ride Hailing Needs More Compelling Applications
A 2018 Arizona State University Study led by PhD student Matthew Wigginton Conway and co-author and assistant professor Deborah Salon showed that ride-hailing has doubled the growth of “for-hire” vehicles (which included taxis) over the past 10 years. However, despite this growth they still accounted for about 0.5% of all vehicle trips. This is supported by a 2017 McKinsey study that showed the total number of vehicle miles traveled (VMT) for ride-hailing in 2016 was around 1%.
This is not meant to say that ride-hailing is not popular. It is very popular with its base of young, metropolitan users. That base, however, is relatively small. For a company like Lyft to really take off, it needs to offer more compelling applications.
For example, the Arizona State study showed that getting a ride to and from the airport was one of the key reasons for consumers to use a ride-hailing service. But that’s only one example. And it’s hard to make the case that people are going to fly more because a ride-hailing service can take them to the airport.
Uber (NYSE:UBER), the unquestioned leader in the ride-hailing space, is trying to create a “killer app” with Uber Eats. However, Uber is finding that the food delivery model is much different than its core ride-hailing model. It’s also far less profitable.
A Defined Cost Structure May Invite More Competition
A core reason why Lyft and other ride-hailing services can keep costs low is because the drivers are not employees. These companies were set up to be a side hustle for drivers who already had another job. The model works when the other job is providing health care and other benefits.
But as these services began to catch on, unemployed workers saw a company such as Lyft as a bridge, or even a full-time opportunity. This has made the model more complicated.
In California, Assembly Bill 5 (the “gig work bill”), which was passed by the state assembly in May, can potentially change the cost structure for Lyft, and not for the better. Keep in mind, Lyft is already losing billions of dollars a year.
Is Lyft a Software Company or a Transportation Company?
Wherever you stand on the “independent contractor or employee” question is probably based on how you categorize a ride-hailing company. LYFT and UBER would like you to see them as software companies. They are merely providing an app that makes it convenient for users to schedule a ride.
In this way, they like to compare themselves to Amazon (NASDAQ:AMZN). The reality is that Amazon was able to take advantage of an existing shipping infrastructure. And Amazon transports packages, not humans.
Regulators and even some of ride-hailing customers are starting to view Lyft and other such companies as transportation companies. The reality is that ride-hailing companies can’t exist without the drivers. But the relationship between the companies and their drivers is becoming complex.
What Will Lyft Look Like in 5 Years?
As I see it, the outcome of the case doesn’t really matter. And that’s where this gets interesting. Lyft exists in an industry that is ripe for copycats. And there are small, private companies like GroundLink, Turo, HopSkipDrive, Gett, Lift Hero, Curb, Wingz and UZURV that are already making in-roads in this space.
However, I imagine a barrier to entry is the threat of regulation on the defined cost structure. Once that is resolved, it’s not a big leap to think other competitors will enter the space. What makes this more intriguing is that the ride-sharing space (which is related to but distinct from ride-hailing) is getting crowded with companies such as Bosch and Sony (NYSE:SNE) entering the fray.
All of which is to say the industry is in a transition phase. But how does Lyft get from point A to point B? One thought is that they will see growth in their own ride-sharing program. This initiative includes a commitment to reducing their carbon footprint with a fleet of electric cars.
Another growth opportunity comes from the possibilities that will come from autonomous vehicles. But for all the hype surrounding it, the reality of autonomous vehicles seems years away. And that’s not factoring in a potential recession which could hurt the industry.
Lyft Stock May Be Already in a Race to the Bottom
One concern I have about Lyft stock is that the industry became a commodity almost as soon as it started. Industry bulls will say that the company benefits from “optionality”. This means that consumers have LYFT as an option, but not an obligation for their ride-sharing needs.
But I can have a car service pick me up in my driveway and drive me to and from the airport in my own car for a very modest fee. So, I don’t see optionality as being an advantage.
If you tell me that Lyft will still be one of only two or three significant players in the next ten years, then I like the stock. But I don’t see that being the case.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.