Having raised around $2bn at their IPO launch a few weeks ago, all the early optimism over a post-IPO pop for Lyft has evaporated with the shares languishing well over 15% below their IPO price.

Last night’s Q1 numbers aren’t likely to alleviate the concerns about the sustainability of the business model either, after the company reported a loss of $1.1bn for the entire quarter.

While the majority of the losses can be attributed to the costs of getting the IPO out of the gate, without them the operating loss was still $211.5m, more or less equivalent to the losses seen a year ago.

On the plus side revenues showed an improvement with revenues coming in at $776m, helped by an improvement in revenues per active rider which rose from $28.27 to $37.86, while total users rose to 20.5m, from the 18.6m in its IPO filing.

For Q2 Lyft has estimated that revenues could increase to over $800m with total revenues for the year expected to come in at around $3.3bn.

This is certainly in the right direction and will probably offer hope ahead of this week’s Uber IPO which is due to get out of the gate on Friday.

What these numbers don’t do is disguise the fact that these ride sharing companies are likely to struggle to make the type of money to offset the current level of losses in the short term.

As if to remind investors of the risks involved in both companies business models, the drivers of both Lyft and Uber have gone on  a 24 hour strike today to protest the labour practices of both companies, while some drivers are also filing class actions against their employers for bad practice.

This suggests that there remains a limit to the level of profits that the companies can make on the number of trips that their drivers complete. Notwithstanding the competition in the sector these drivers also need to make a living.

If anything the IPO’s of both companies has crystallised the divide between the management of these companies, who stand to make millions, and the drivers who in some cases have to work long hours to make ends meet.

These types of protest are one such risk factor for the business model, along with regulatory ones, and while management can argue that the future for ride sharing apps is likely to be driverless cars, thus removing the need for a driver, this technology still remains largely untested, and carries significant risks, in terms of accidents. Lyft is already going down this road with Waymo in the Phoenix area.

As we’ve seen with the MCAS system for the Boeing 737 MAX, when technology goes wrong the effects can be catastrophic.

This gets to the heart of the technology conundrum with the use of computers and algorithms to drive cars and fly planes.

Computers are only as good as the software that runs on them, and while computers are good at carrying out various instructions, they lack the ability to creatively give them, and this is a significant flaw. In short computers can’t think ahead and lack the human element of intuition and experience that can help avoid or mitigate an unexpected train of events.

For now the company’s losses while not sustainable in the long term can be absorbed due to the company’s backers, with General Motors owning a 7.76% stake and Google parent Alphabet a 5.33% stake, however these shareholders got in on the ground floor.

When people talk about Lyft or Uber becoming the next Amazon they fail to appreciate that Amazon didn’t have a multibillion dollar valuation when it first came to the stock market.

This may seem a quaint notion but for companies to be sustainable they need to be profitable, and their valuations need to reflect the underlying fundamentals.

On no measure do a lot of these tech unicorns reflect the fundamentals of the underlying business, and for that reason alone they are a risky punt. This is something that Lyft shareholders should have been aware of when they filed a class action saying that the company misrepresented its fundamentals in its S-1 filing, as well as failing to disclose safety problems with its shared electric bicycles.

While Lyft may well have a case to answer on both counts, even if the problems were known I’m not convinced that they would have made that much difference, to most investors decision to pile into the shares. The knowledge of these facts certainly don’t make the company any more or less investable.

They still remain overpriced with a valuation based more in hope than reality.

That of course probably won’t stop investors from trying to look for the silver lining in both Uber and Lyft and look to get into the shares in the coming weeks.

 

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