Why Lyft/Uber IPOs Are Sucker Bets

April 2, 2019

The timing of Lyft’s IPO last week could not have been better for Wall Street insiders, since they will have an opportunity to unload their shares into a veritable orgy of greed and ignorance. The stock market looks unstoppable at the moment, and it is making Lyft’s $24 billion valuation seem somehow less absurd. Just four months ago, when shares were in the throes of what many of us mistook for a bear market, the prospect of taking Lyft public must have seemed not merely unappealing to its owners but grim. The company had no earnings at a time when investors were diving into defensive stocks. How things have changed! What might have been a march to the gallows now promises to become a wilding spree as investors clamor for profitless unicorns. Who needs earnings in a bull market that will continue forever?

In this heady climate, there is unlikely to be any serious discussion about why Lyft could prove to be such a bad bet. Naysayers have questioned whether the ride-hailing service can earn money. But their arguments have focused mainly on whether Lyft’s far larger competitor, Uber, would doom the firm’s chances for success in a market were Uber itself hasn’t been able to get profitable. Regardless, it’s safe to assume the companies will continue to beat each other’s brains in even as the ‘creative destruction’ they leave in their wake lays waste to the world’s taxi fleets.

The REAL Competition

But there is yet another competitor as yet unrecognized by investors. I am referring to Tom, Dick and Harry, you and I, our neighbors and colleagues; for any one of us could create a ride-hailing service practically overnight using software that does everything Lyft’s and Uber’s does and more.

I know this because I have been chauffeured in vehicles owned and driven by entrepreneurs who charge less than Lyft/Uber; who offer better service, including a free stop or two en route to a destination; who allow the scheduling of rides weeks in advance in markets where Lyft and Uber do not; and who have been building word-of-mouth, repeat business successfully. For a shot at being truly their own bosses, and at recruiting others to work for them, these individuals are willing to take somewhat less than the $13.70/hour reportedly earned by Uber drivers (that is before car expenses, by the way). It is predictable that they will. There are millions of them, eager to get off the minimum-wage treadmill. It is the American way for workers to seek better. Over time, they will pick away at Uber’s and Lyft’s already low margins and win over customers with frills that Uber and Lyft shareholders will disdain to provide.

Creative Destruction

If a $24 billion valuation for Lyft seems absurd, consider that Uber’s handlers will be looking for five times that, or around $120 billion. Investors had better wise up to the fact that the same creative destruction that Uber and Lyft have unleashed on the transportation world has not run its course, not by a longshot. The endgame will be great in any case for fare-paying riders, but anyone who thinks shareholders are about to clean up is delusional.

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