Shares of Lyft are off sharply this morning, falling nearly 20% in early trading. The company’s equity is selling off in the wake of the U.S. ride-hailing giant’s first quarter results and its comments regarding the current quarter, and how its new strategic posture will affect its growth and economics in the coming quarters.
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In the wake of Lyft’s decision to remove its founders from day-to-day control, dramatically cut staffing and bring in an external CEO, the company is now a leaner organization under new management. However, while Lyft saw its valuation slashed after it reported its results and updated strategic posture, shares of Uber have risen sharply in the wake of its own earnings update.
You could argue that Lyft waited too long to shake up its operations, given the tough comparison to Uber after both company’s Q1 earnings reports. But Lyft is taking a new tack now, which we need to understand.
While Uber and Lyft are among the best-known on-demand companies in the U.S. market, countless startups have tried to use similar models to build businesses of their own in the last half-decade. So, as Uber and Lyft do, so perhaps do the surviving startups that tried to mimic their meteoric rise.
This Friday morning we’re parsing Lyft’s Q1 results and Q2 guidance, the latter of which we’ll place in context of its strategic choices moving forward. Notably there’s quite a lot of what Lyft is doing that nests neatly into other corporate choices that we’ve seen recently. Many other tech and tech-enabled companies are looking to reduce their headcount, remove layers of management and hone their product focus. From that perspective, Lyft is part of a larger trend. Let’s see how those choices fit into its future product and pricing choices.
Lyft’s Q1 results and Q2 guidance
In the first quarter, Lyft reported revenues of $1 billion, up 14% compared to the year-ago period. For context, the company’s revenue was also around $25 million ahead of its own estimates. Lyft reported $22.7 million worth of adjusted EBITDA in the first quarter, again ahead of its own estimates for the period. The company also beat street estimates for the first three months of 2023.
Q1 is one thing, but it’s the future that investors have their eyes on starting with Q2. Lyft isn’t exactly getting their hopes up. Here’s how our colleagues described Lyft’s forward-looking guidance:
Lyft issued guidance for the second quarter of about $1 billion to $1.02 billion, an indication that the company is not expecting much growth in the coming quarter. On an adjusted EBITDA basis, Lyft expects to earn between $20 million and $30 million, with an adjusted margin of 2% to 3%.
Notably, the company did not issue guidance for the full year, a move that can suggest the company is uncertain about its future or an expectation of changes to come.
These lukewarm prospects are likely the main explanation why Lyft stock tumbled after its earnings report. Especially when we consider that street estimates for its second-quarter results expected a revenue result of around $1.08 billion.
But there’s also a paradox in its Q1 results that could have caused mixed feelings.
The paradox in question is that rides are up at the company. “Our year-over-year ride-share ride growth rate accelerated in Q1 for the first time in nearly two years,” CFO Elaine Paul said during the earnings call. And yet, the company is projecting nearly flat revenue growth.
The explanation for this seeming contradiction can be explained with one word: pricing. Reading between the lines, Lyft was pricier than Uber in preceding periods. According to Paul, focusing on “pricing competitively” was a key factor in ride-share growth in Q1. But obviously, lower pricing is also a reason why Lyft’s revenue won’t be growing much in the near future.
Taking a step back, a strategy that relies on cutting costs and pricing in a way that helps garner increased market share does seem to make sense for Lyft, even if it doesn’t please investors in the short term. The question, though, is how much time the company has to get things right.
Financial impacts
In one sense, Lyft has ample time to figure out its new strategy. The company’s forecasted continued adjusted profitability indicates that at least in the near term it won’t revert to non-adjusted losses; getting to positive adjusted EBITDA was a big goal at the company in years past, and losing that badge of progress would be a blow.
Its cash burn is also survivable when compared to its cash reserves. In the first quarter, for example, it reported adjusted EBITDA around the same level that it expects for the second quarter. In the same three-month period it reported operating cash consumption of $74 million, down from $152.3 million in the year-ago Q1 period. Presuming that Lyft’s operating cash burn tracks to its adjusted EBITDA at least loosely — and given that adjusted EBITDA removes many cash costs, this is not a stretch — we could anticipate a similar pace of cash consumption for the second quarter. Compared to its more than $1.75 billion in cash and short-term investments, Lyft can afford to self-fund for a long time.
From another perspective, it has less time. Lyft did not shed its historical leadership because it was about to run out of cash, but because its underperforming share price likely led to enough pressure to force a change. The company’s dramatic share-price decline in the wake of its earnings and forward guidance (both financial and strategic) implies increased pressure on its operating team in the near term.
In Lyft’s favor are its cost cuts. The company is reducing its overall cost footprint by about “$330 million in annual savings when [the cuts are] in full effect,” said CEO David Risher on the call. Changes to how it compensates employees will reduce its roughly $750 million in share-based comp in 2022 to “$550 million in 2023 and $350 million in 2024,” he said. Given that Lyft is worth just $3.275 billion as of today, those reductions are critical to combat dilution at the company.
The question ahead of the company is whether its work to lower its prices will drive enough ride volume gains to allow it to return to material growth. It seems clear that the company believes it can drive incremental ride volume with more competitive pricing — again, made possible by cost cutting, to a degree — but what is less clear is how quickly less attractive per-ride economics can be surpassed by the benefits of a more quickly growing ridership.
We’ll be able to track this with relative ease thanks to Lyft’s quarterly breakdowns of its active ridership and revenue per active rider. The latter moderated from Q4 2022 levels to a result similar to what it saw in Q3 2022 in the first quarter of the new year. If Lyft’s strategy is working as intended, we expect that it will hope to see its active rider count accelerate as lower-cost rides help it attract market share over time. After all, if you want to post revenue growth, you need to grow either revenue per rider or total riders if the other holds steady; if you are going to reduce per-ride revenue, we anticipate that Lyft will need lots more total rides (and therefore riders) to reignite its growth engine. Of course, we could see Lyft’s ridership stay flat and post revenue growth provided that its existing active customers take lots more rides, but that appears a harder task than simply expanding its active rider rolls.
Lyft is a pure-play U.S. ride-hailing company. That means it can focus. Uber, in contrast, not only has a more diversified geographic footprint, but also a far more complex business in product terms.
Meanwhile, Lyft is reducing the complexity of its own offering. Already last year it closed down its car rental scheme. And in an interview with TechCrunch soon after getting appointed, Risher said that he wanted the company to “focus on the basics of ride-share.” He reiterated this during this quarter’s earnings call, referring to Lyft as a “pure play on ride share.”
The question for Lyft is whether its choices to stay product- and market-focused are boon or bane.
We’ll be watching.