Lyft & Robotaxis– Short-term gain

Lyft sells its differentiation.

• Lyft may have sold a struggling asset but in a world of robotaxis, this asset was the one chance Lyft had at winning any differentiation highlighting just what a brutal commodity the robotaxi industry is going to be.
• This is where I think that both Elon Musk and Ark Invest have made a mistake as both are assuming that robotaxis will be a high-margin differentiated business.
• It is from robotaxis that part of Ark Invest’s eye-watering $3,000 price target on Tesla is derived underpinning my view that the fundamentals upon which this is based are very shaky.
• Woven Planet Holdings Inc, a subsidiary of Toyota will pay $550m in two tranches to acquire all of Level 5 which is Lyft’s autonomous driving unit.
• Lyft is an also-ran in the autonomous world having driven 32,731 autonomous miles in California in 2020 which is around 5% of the mileage put in by Cruise and Waymo.
• It performs in the middle of the pack with 266 miles driven per disengagement which is 112x worse than Waymo which managed nearly 30,000 without a disengagement.
• The California DMV data is deeply flawed but to date, it has been a reasonable representation of reality which is why I have continued to use it as an indicator.
• The sale of the asset will allow Lyft to come closer to profitability as costs will fall by $100m a year but I think that it has sold its only hope for differentiation.
• This is because when the driver is no longer needed, the entire nature of the ride-hailing industry will change.
• The current providers like Uber, Lyft, DiDi, and so on will no longer be market-places but instead will become service providers as the supply side of the marketplace (the drivers) will have been eliminated.
• A key element of the quality of a robotaxi service will be how good the autonomous driving solution is which Lyft will now have to source from a 3^rd party.
• In almost every case, the 3^rd party will need to sell the solution to multiple service providers meaning that the service providers will become little more than commodities.
• This is why I think that expectations of high margins for robotaxi businesses are deeply flawed.
• Right now, ride-hailing costs about $2 per mile to the passenger which Tesla assumes will come down to around $1 per mile for its robotaxi offering.
• The cost to provide the service will be around $0.33 per mile giving 66% gross margins at this price point.
• If there was only one autonomous driving solution available, this might be possible but the reality is that the market is already crowded and there are 3-4 solutions at the top that are increasingly similar in performance (see here) in the USA alone.
• This means that there will be plenty of solutions available meaning that barriers to entry will be very low resulting in brutal competition.
• Hence while Tesla’s cost estimate for robotaxis looks about right, the price forecast is way off and should be more like $0.40 per mile.
• I expect that the robotaxi industry is going to become a business that is all about scale where good money is made by having very large volume where the margin is made through operating leverage.
• This is pretty much where the taxi industry is today although, at $0.40 per mile rather than $2 per mile, demand for robotaxis is going to be far higher than it is for taxis today.
• Hence, in the long-term, there is likely to be less vehicle ownership and more asset sharing especially in the cities as the economics for users become far more compelling when compared to owning a vehicle.
• However, for the likes of Lyft, Uber, and so on, it means that they will need to continue fighting tooth and nail for market share and that only the very biggest will survive.
• Lyft is not the biggest in its market meaning that it has a lot of work to do if it intends to make a reasonable profit and offer a return for its shareholders.
• I am not very confident of either of these two which is why I have no desire to own Lyft.