Ride-sharing service Lyft is expected to be one of 2019's highest-profile IPOs, with an expected initial public offering in the next few weeks which could value the firm at more than US$24 billion ($33.8 billion).

The firm has successfully gained market share, going head to head against the market leader, Uber - which is expected to go public next month.

Lyft has been successful in pursuing riders in an addressable market – including taxis, ride-sharing, bikes, and scooters – that we value based on gross revenue at more than US$500 billion by 2023, growing 24 per cent a year over the next five years.

In our view, Lyft warrants a narrow economic moat – or slender competitive advantage – thanks to the network effect around its ride-sharing platform and intangible assets associated with rider, rides, and mapping data.

We think these assets can drive Lyft to profitability and excess returns on invested capital in the future. Network effect means that, the more people use a product or service, the more new users are attracted to use it.

Lyft has raised about US$5 billion in capital according to PitchBook. Its eleventh and last round of funding in June 2018 was for US$600 million, which implied a valuation of US$15 billion.

We believe the intrinsic value of Lyft is likely much higher, beyond US$24 billion, as further growth remains in the ride-sharing market. We think Lyft's top line can grow at a 36 per cent compound annual growth rate through 2028 to more than US$21 billion, driven mainly by increased adoption of ride-sharing globally.

We have assumed that the firm will become profitable in 2022.

In terms of the IPO price, based on PitchBook data on recent venture capital-backed software companies, we expect the price to represent Lyft as valued at between US$18 billion and US$30 billion.

Autonomous vehicles

From a strategic standpoint, Lyft is well on its way to becoming a one-stop shop for on-demand transportation.

It has tapped into the bike- and scooter-sharing markets, which we think are worth more than US$9 billion and growing 9 per cent annually until 2028.

Lyft also appears to be aggressively pursuing the autonomous vehicle route as it understands that self-driving cars may help the firm expand its margins because without drivers it could recognise a bigger chunk of the fare as its net revenue.

In contrast to Uber, Lyft is not focused on food transportation or logistics.

We like Lyft's relatively narrower focus on consumer transportation, but still note that Uber has an edge on Lyft for the following reasons:

  • Uber had an earlier start
  • it has higher market share, and
  • a stronger network effect around its service

We note that within the rapidly growing ride-sharing space, many risks remain around legal and regulatory matters.

Lyft’s regulatory issues today involve how the company runs its everyday business, from employee type recognition to a minimum pay requirement.

Various other requirements such as background checks and driver classification are also being enforced. In our view, pressure brought forth by such legal matters will persist.