With new leadership and a soon-to-be-thinned employee base, Lyft is going to look a heck of a lot different at the end of 2023 than it did at the start. After its co-founders said they’d relinquish their roles as CEO and president in March, the company last week said it intends to dramatically cut its staffing by as much as 30%.
The changes were probably necessary. Lyft, as it turns out, is not nearly as valuable a company as its founders and backers once expected. That’s an odd thing to realize if your startup was able to raise billions while private and eventually price its public offering at $72 per share, raising more than $2 billion and commanding a fully diluted market cap of around $24 billion.
Things have changed, though. Lyft’s shares ended last week at $10.44, up a solid 6% on the news of the impending layoffs. That helped it recoup some of its lost value, but the company is worth just $3.9 billion this morning.
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It’s somewhat strange to consider, but the ride-sharing company’s stock is trading near historic lows despite it reporting revenue of $1.18 billion in Q4 2022, its best single-quarter revenue result ever. The company lost around a third of its value after it forecast revenue for its first fiscal quarter below what analysts had estimated.
The lesson here is that quick revenue growth can make companies look like they’re excellent investments when capital is cheap, but it’s often hard for any firm to outrun the relative valuation range for its industry, even if it is tech enabled.
Lyft is only the latest to join the group of public-market duds that have spent time as venture darlings. To pick only two examples: Allbirds has given up most of its historical value, and Warby Parker has shed around 80% of its peak valuation. The list is long and some of the most beat-up recent venture-backed IPOs share a quality today: Impressively low revenue multiples.
The squeeze
We talk a lot on The Exchange about revenue multiples, mostly discussing what the value of one dollar of recurring, hosted software revenue is worth. We use this perspective frequently because software is the most common startup product and software as a service (hosted software, that is) is the most common business model.
To understand the startup investment and valuation game, we must understand the worth of what they are creating. Namely, recurring software incomes.
The market has decided that Lyft — and to a lesser degree, Uber — are not software companies. We can see this in their trailing 12-month revenue multiples. Lyft is worth 0.92x its trailing revenues today. Uber is worth a far-healthier 1.92x its own. (All revenue multiple data via YCharts.)
Both numbers are down sharply from around two years ago, when both Uber and Lyft were each worth around 10x trailing revenues. There are some historical reasons for those price/sales multiples, including the fact that those companies had come off a period of depressed user activity due to COVID restrictions. Still, they indicate the level of optimism around both companies has largely deflated.
There are other examples of former venture darlings trading at multiples starting with a zero: Allbirds is worth just 0.60x and Warby Parker is the leader of our group so far with a 2.09x multiple. (For reference, the median forward 12-month revenue multiple for software stocks is 5.6x today.)
The good news is that even these beleaguered companies are faring better than airlines, which are worth around 0.4x their trailing revenues this year. The bad news is Lyft’s 0.92x multiple is around what you’d expect of a publishing company and it’s right on target for transportation, more generally.
If you asked a venture capitalist if they would invest in a trucking or coal company, you’d be reminded of a toddler refusing broccoli because those companies do not generate revenue fast enough to make for enticing venture opportunities.
Venture capital works because tech companies have high gross margins and can conquer, grow or create markets. This leads to mammoth profits and, often, deep moats. In contrast, a lot of venture capital during the boom went into companies that might have looked like tech companies due to extensive tech investment (Uber and Lyft are not simple systems to build and run) but were really transport companies with an extra cost layer.
I have spent countless dollars on both Lyft and Uber over the years, much like yourself, so don’t put me into the hater column. I’m only sorting out how a bunch of former startups that we covered nigh ceaselessly wound up being valued like insurance companies.
In the case of Lyft, the upcoming cost cuts make financial sense. Looking at the company’s quarterly results since the start of fiscal 2021, the company has never posted positive operating income or net income, and it has reported positive operating cash flow only once. For a company spending around $200 million per quarter lately on share-based compensation, that’s not a great look.
The question is whether Lyft can compete with its more diversified rival, Uber, with a smaller tech team. We’ll be watching, but no matter how Lyft fares, it’s worth remembering that the difference between an actual software company and a company that offers a service via software is often massive and tough to overcome.
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