Shares of Lyft are expected to start trading on the Nasdaq on Friday in a highly anticipated initial public offering (IPO). Though not as large as its rival Uber, the ride-sharing company is targeting a lofty valuation of $24.3 billion (based on a $72 per-share price for its IPO). Amid the bluster and excitement, investors need to ask themselves whether Lyft’s fundamentals support that valuation. A close look at the company’s customer economics suggests it will achieve profitability. But will it be profitable enough?
Starting with the customer
Theta Equity Partners (“Theta” below), a research firm, has pioneered customer-based corporate valuation (CBCV), a methodology that looks at underlying customer behaviors and their impact on a company’s value. The key drivers of CBCV for a nonsubscription business are:
- The average cost of acquiring customers (customer acquisition cost, or CAC)
- The value customers generate (postacquisition value)
Subtract the first item from the second and you are left with what Theta calls the customer lifetime value (CLV).
Postacquisition value, in turn, breaks down into customer retention (churn), rides per active customer, revenue per ride, and the variable margin on those revenues. If you can estimate these metrics for a specific addressable market, you can forecast the company’s future cash flows (after subtracting fixed costs). Those cash flows, discounted back to the present at an appropriate rate, produce an estimate of the company’s fair value.
In a two-part series of blog posts on its website (here and here), Theta applies this framework to Lyft, using data provided in its offering prospectus to derive a fair value for the company. If you’re considering buying the shares, I strongly urge you to read both posts carefully — you won’t find a better analysis in the public domain.
“A source of hidden value”
After running the numbers, Theta estimates that Lyft has a positive average customer lifetime value of $19, based on a postacquisition value of $51 and a CAC of $32. But those summary figures mask some key insights (emphasis in the original)…
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