Shares of No. 2 ridesharing platform Lyft (NASDAQ: LYFT) took a big hit yesterday, dropping 11% on reports that larger rival Uber could file its own public S-1 Registration Statement with the SEC any minute now, opening up its own books for the first time. Uber is expected to raise around $10 billion in fresh capital at a valuation of $90 billion to $100 billion, which would both bolster Uber's war chest while drawing away investor attention from Lyft.
After getting hit with their first sell rating earlier this month, another analyst is shifting into neutral on Lyft shares.
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Still in Uber's shadow
HSBC has initiated coverage on Lyft, starting the stock off with a hold rating alongside a $60 price target. While analyst Masha Kahn is bullish on the ridesharing industry's growth, competition will be intense and will make margin expansion incredibly difficult. "We are bullish on the growth prospects for ride-hailing, but as the clear No. 2 in the US, Lyft is likely to face a bumpy ride," the analyst wrote. "Autonomous driving could be a game changer for ride-hailing, but this looks unlikely before 2025."
Autonomous driving has long been hailed as the ridesharing industry's inflection point, carrying the potential to dramatically revolutionize a labor-intensive cost structure that when combined with low fare prices is currently unsustainable. However, Ford CEO Jim Hackett conceded just this week that the technical challenge surrounding autonomous driving is far greater than previously expected. "We overestimated the arrival of autonomous vehicles," Hackett said at a Detroit Economic Club event earlier this week. Hackett should know, too: He was previously in charge of Ford's autonomous driving division.
"Given that smaller, number two players will always scale at a lower margin than dominant players, we think Lyft deserves a discount to other ride-hailing players that dominate their markets," Kahn added.
Uber is a notoriously fierce competitor and known for offering aggressive pricing in order to preclude rivals and expand its market share. Competitors are forced to respond with low prices of their own, and the industry consequently burns through copious amounts of capital. Uber will simply have more capital to burn. If all of Lyft's underwriters were to exercise their options, the company would have ended 2018 with $3.1 billion in cash and cash equivalents on the balance sheet, according to Lyft's prospectus.
Even before seeing Uber's recent financial statements, the company has always been better capitalized than Lyft. Uber had raised a total of $24.2 billion in private funding rounds, according to Crunchbase, compared to Lyft's $4.9 billion (not including its IPO). The $10 billion alone that Uber is looking to raise through its IPO will tower over Lyft's cash position.
Until robot cars are a thing, investors should consider taking it slow in the ridesharing industry.
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