Where Will Lyft Stock Be In 5 Years? (NASDAQ:LYFT)

Lyft (NASDAQ:LYFT) is right where it’s always been: the number two player in a two-player market. While, in a market as lucrative as mobility in the US, being second to Uber (UBER) can still be highly profitable, Lyft continues to suffer losses as it tries to recover from COVID-19. Three years after its IPO, what went wrong, and where will it be five years from now?

Lyft Stock Key Metrics

If there was an argument to be made for buying into Lyft, it would probably start with its price. At under $14 Lyft is now less than one-fifth the IPO price it debuted at, and its market cap is now below $5 billion. If a major investor or another company thinks that ridehailing will become a profitable business in the future, they can now buy into Lyft – or just buy Lyft – for considerably less than what I calculated it would cost to build a ridehailing company from scratch.

Its Enterprise Value is even lower, owing to the company’s $1.1 billion net cash position. At a cash burn rate of roughly $200 million last quarter and total cash of roughly $2.2 billion, it is in no imminent danger of going bust.

What Happened To Ride-Sharing

“What went wrong?” is a question I could spend all day on. Frankly, while I still think Lyft and Uber have enormous potential to effect nothing less than economic and social revolution, they have not gone about it in the way I assumed they would, and I have lost most of my faith in management. But for now, let me focus on what went wrong with what I thought was going to be the key to their profitability: ridesharing.

First, I should clarify that when I talk about “sharing,” I mean true ridesharing; not ride-hailing, which is the more commonly given example of how Lyft and Uber operate. True ridesharing is the less commonly known – and apparently, much less beloved – UberPool and Lyft Shared services that pair two or more unrelated riders who are traveling in similar directions.

These services were highly controversial among investors from the beginning. As a strong supporter of them I received considerable pushback from those who argued that these services would never become the primary transportation method, because people value the traditional car experience – privacy, control of the vehicle, thrill of driving, no detours, etc. – too much.

Laid Low By COVID

COVID-19 took the debate from pitched to moot almost overnight. Uber and Lyft both suspended shared rides to help slow the spread of coronavirus and eventually they were officially discontinued for the duration of the crisis. They are only now, slowly, being brought back online, and they’re a shadow of their former selves.

I’ve already written extensively about ride-sharing over the past few years; indeed, at one point ride-sharing was the center of my thesis for why Uber and Lyft were good long-term investments. I still believe that before COVID-19 blew up ridesharing as a business model, it was being substantially underestimated by the industry and investors at large. But even I concede that its future post-COVID is murky at best. There is certainly an argument to be made that as we move past the pandemic the old dynamics will reassert themselves … but there is also an argument that they won’t.

First consider how slowly they’re returning. Lyft started with just two cities and is only gradually rolling out Shared to more of them. At this rate it will be years before they fully return.

Then there’s how much more operationally difficult they are post-COVID. When Lyft first brought back Shared rides it announced that masks were mandatory for everyone, but now Lyft is urging riders to “respect one another’s choices” so debates about masks – and who gets a refund if the riders have different opinions about them – are probably going to be a real overhang now too.

Go Ahead, Say I Told You So

It’s also worth noting that few were ever as convinced as I was about the economics of shared rides. Most consider them wasteful and anti-consumer. Lyft is also now telling drivers they can cancel or refuse Shared rides without penalty which will hurt the efficiency even more.

Altogether, I still think Shared rides have considerable potential in theory, but I doubt they’re going to deliver much profit in reality for the foreseeable future unless everything goes back to pre-COVID norms. Put this in the “would be nice but don’t count on it” category.

Two Scenarios

This leaves me far less optimistic on Lyft’s future profitability – though admittedly it would only take a small sliver of profitability to justify a $5 billion market cap in a $2.5 trillion mobility market, counting private and ridehailing services. Even so, I’m considerably more skeptical of Lyft than back in the days when I thought it was poised to lead a veritable revolution. In a steady as she goes scenario, I foresee a hard slog for Lyft with maybe a sliver of profit at the end, but not enough to get it much above its current market cap.

There is, however, another scenario where Lyft does much better and even could become a true breakout stock, perhaps even the next Netflix or Amazon in its compounding growth. After over a century of abuse and mismanagement, cities and states seem to finally be looking more seriously at curbing rampant waste in the biggest industry in America no one ever talks about: parking.

The Costs, And Subsidies, Of Parking

Parking is the single most underreported aspect of driving operations in the US and it makes meaningful analysis with reliable data difficult. But even the lower end of the estimates has 700 million parking spaces in the US, almost three times as many cars – and drivers – as are in the country. The high end estimates are that the US has two billion parking spaces, roughly eight spaces for every car in the country.

The cost of parking is all over the map, regardless of whether we consider the question individually – many inner-city commuters can spend hundreds of dollars a month parking their cars – or nationally. Altogether, America spends anywhere from $5,000 to $50,000 to construct each parking space, depending on a myriad list of factors including covered or uncovered, paved or constructed, and of course location and prevailing wage rates and material costs.

At a conservative $5,000 average, even assuming each space lasts for 50-70 years with no maintenance costs, America as a whole is spending anywhere from $100 billion to $500 billion per year on parking. Spread over the 17 million cars America produces every year when COVID isn’t wrecking supply chains, this is basically an additional $6,000 to $30,000 per vehicle in costs. A more realistic $10-$15,000 average would double or triple these numbers. This makes parking one of the larger industries in all of the United States.

The tricky part is, these numbers and costs are far above what market analysts tell us almost everyone is willing to pay for parking. And they’re far above what any person in America actually pays for parking. But that doesn’t make them wrong. The explanation is simple: most of what parking actually costs is not reflected in our parking costs. Instead, we pay for most of our parking through higher totals in two other bills every American recognizes: housing and taxes.

Development Mandates

In the US, for decades, state and local zoning laws have almost invariably required almost any structure, residential or commercial, to provide a mandatory minimum number of parking spaces proportionate to the number of people likely to use the building.

But at least in the average US city, where such parking is unlikely to be the cheap, ground-level, simple paved gravel parking, consumers almost never pay enough for parking to cover the costs of those spaces. Because they couldn’t possibly. In the US above-ground parking garages cost $20,000-$30,000 per space and subterranean costs as high as three times as much. In other words, it’s not uncommon for a parking space to cost more than the car that is sitting in it at any given time. And with at least four times as many spaces as cars, most of the time there’s no car sitting in them at all.

Because most consumers are not willing to pay the full cost of such parking facilities, the bulk of their costs get folded into the rental cost of the mall, restaurant, home or other structure that the parking is attached to. In the average American city, 15% of the cost of housing is actually the cost of the parking spaces attached to the housing.

Tax Treatment

Less significant but still worth mentioning is the preferential tax treatment parking receives from state and local governments. The federal government arguably also subsidizes parking, by allowing employers to deduct as a cost the parking they provide free to employees, but at “only” $7.3 billion a year this is relatively small potatoes, partially counteracted by the $1.3 billion the federal government spends on commuting tax benefits.

State and local tax favor is more significant because they are the ones who levy property and land taxes, where parking really gets its government largesse. Because property taxes are based on land and usage, parking garages often pay a fraction of what a building right next door pays for the same size and occupancy rates.

A Flash In The Pan, Or A Building Tsunami?

In the few years before COVID hit, there were some green shoots suggesting that cities were starting to rethink things. One town in New Jersey decided to reallocate $20 million in funding for a new parking garage near the train station to subsidizing rides in ridesharing services, reasoning that the parking garage might become a stranded asset as car ownership declined. Lyft and Uber also sometimes subsidized rides themselves, just to get their operations scaled up in a new city, essentially helping to cancel out the subsidy parking was getting.

Post-COVID, seemingly everyone wants to own a car, so hopes for reform have dimmed. But perhaps they shouldn’t have. More quietly, there are still ongoing efforts to reduce parking subsidies.

Certain cities and states are beginning to apply an excise tax to off-street parking on top of the property taxes, and the US federal government also considers from time to time proposals for “parking cash parity” laws. Modifications to the parking mandatory minimums have also been made in several cities and are being considered in many more. The real surge has been in the states, a few of whom are beginning to abolish them statewide.

Right now, though, these efforts are relatively small; most cities haven’t taken action yet and most state laws still come with substantial exemptions. The question is what will happen if the trend keeps going. How much could parking costs go up, thereby making Lyft’s services that much more competitively priced?

Calculating The Subsidy

Some analysts call parking the single largest expense of car ownership in the US. That’s almost certainly an exaggeration from the consumer’s perspective, though it probably is already true for New York City dwellers, where parking costs almost twice as much as it does in the second-most parking-challenged city (Chicago.) In New York City, parking costs close to $800, and Boston, Philadelphia and Washington, DC are at or near $400. Lots more cities, including Seattle, Sacramento, New Orleans, Pittsburgh and other cities that we wouldn’t normally associate with “carmageddon” have parking costs well above $200.

But in the absence of subsidies, parking would become the greatest cost of cars for almost all of us. More than enough, almost certainly, to convince us to simply Lyft most places instead.

Our Best Numbers

As I said, the lack of reliable nationwide data makes putting numbers on this difficult, but let’s give it a try anyway. There are basically three kinds of parking. Public on-street parking, whether metered or free, commercial off-street parking garages and “inclusive” off-street parking like at malls, restaurants, etc., as well as at our apartment complexes and homes. Can we put a number on each?

In the US rents are expected to average $2,000 by August. According to Pew Research about 31% of households in the US are true urban. Call it 40 million. At 15% of 40 million households, annual parking subsidies in apartment complexes alone comes to $144 billion a year. I will assume the same for inclusive parking in commercial buildings and double this figure.

Then there’s the public street parking, which is far and away the (artificially) cheapest and most numerous kind of parking in cities. The problem is we really don’t have a good count of public street parking nationwide versus commercial. But in Los Angeles, 19 million total parking spaces outnumber residents 2-1 (and also comprise more square footage than all the lanes for cars and bikes in the city.) Assuming the low end of our estimates at $200 per month, and assuming two public, non-inclusive parking spaces per person in city areas, the 100 million Americans living in the urban core should be paying around $480 billion for parking.

Obviously, as consumers we don’t pay anywhere near this much. If we really wanted to go crazy we could add other arguable subsidies as well. Hartford, Connecticut recently spent $2.5 billion on a stormwater runoff system because the city had become so covered in parking that there wasn’t enough permeable land left to absorb ordinary rainfall. Other studies show – I kid you not – that all the extra asphalt for parking in cities traps more heat in them and raises all our air conditioning bills.

The Flawed Defense

Parking defenders almost always choose to compare parking costs to supported structures. As one defender pointed out, it is not uncommon for $50-$60 million worth of stores and restaurants to condition their construction on the availability of a $10 million garage.

This makes it sound like the parking is enabling the other investments, and thus providing a good rate of return. But of course this begins by assuming the continuation of traditional traffic patterns where people overwhelmingly depend on private automobiles to get to restaurants and stores. The whole point of Uber and Lyft is to break that dichotomy, and make it not only possible but convenient for someone to visit the mall without requiring a parking space.

At some $768 billion a year of imputed parking costs, of which consumers directly pay no more than 10%, there are roughly $700 billion of parking costs every year being subsidized, to Lyft’s detriment since private car travel is now its main competitor.

Implications For Lyft

Lyft and Uber obviate the need for parking by assigning a car to take you to your destination, drop you off, and leave. While that has been attacked as uneconomical because of paying the driver, the drivers Lyft and Uber employs seem demonstrably cheaper than the parking costs of driving oneself on many occasions.

As early as 2017, Uber and Lyft reportedly already accounted for as much as 1% of Vehicle Miles Travelled in the US. While COVID-19 put a damper on personal transport, it also boosted deliveries from restaurants and grocery stores, where parking is also necessary. If we assume they’re now up to 2%, then $14 billion of subsidies have been given to their “competitor,” private car travel. Lyft’s 25% market share means they’ve seen $3.5 billion of subsidies, at a time when they’re losing $200 million per quarter. If they paid their drivers the same, even a 25% cut in subsidies would completely eliminate their red ink. Even if the pay for drivers quadrupled alongside Lyft’s take – Lyft charges a 25% commission – the subsidies are still the only thing keeping them from profitability.

By the way, that little exercise drastically understates the impact of subsidies, because it spreads subsidies evenly over the entire VMT population. In reality, parking subsidies are overwhelmingly concentrated in cities, where Lyft almost exclusively operates but which comprise only a fraction of total VMT. My best guess is that the Lyft subsidy is not $3.5 billion, but more like $10-$15 billion. But this last point I cannot prove. Still, if Lyft went from losing $800 million a year to making $3 billion a year (25% of $15 billion minus $800 million) its market cap would jump 12 fold. And then you consider that there would still be the other 98% of VMT to target, plus international expansion…

Other Investment Implications

This is a Lyft article, but obviously the same implications apply to Uber. What’s more, these changes, if in fact they were ever implemented, would reverberate throughout the broader transportation industry. Certainly Ford (F) and GM (GM) would find themselves in a very different situation if suddenly 100 million urban and another 150 million suburban people didn’t want to drive around the city anymore. Undoubtedly the long-term demand for autos would change drastically. For that matter, oil companies such as Chevron (CVX) and Exxon (XOM) would probably find that the more efficient cars ride-hail drivers tend to drive didn’t need as much gasoline, and perhaps even were all-electric.

Housing would be affected as well, with many probably opting to return to the city as its transportation became less congested and cruising for parking ceased to be an issue. On the other hand, if parking garages suddenly converted to new housing developments, such REITs as Simon Property Group (SPG) and Realty Income (O) might not be quite as happy about that.

Investment Recommendation

It is far from clear that this trend will continue, and that’s what makes Lyft a risky investment. Lyft’s future in a parking-subsidized world looks very different than its future in a free parking market. While the potential of Lyft and parking reform is absolutely massive, I would not buy in until we see far more evidence that governments actually intend to go through with it. I am a Hold on Lyft until I see what direction public policy is going to take.