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Thoughts on investing

May 2019: Lyft Has a Flat Tire

Lyft Has a Flat Tire

Lyft (LYFT), the ride sharing company, priced its IPO at $72 per share on March 28, 2019. On the surface, the company appears to offer investors many attractive qualities. First, the company’s revenues are growing rapidly, from $343 million in 2016 to $2.2 billion in 2018. Second, since Lyft doesn’t own its own cars, instead relying on independent operators, the company’s business model doesn’t require much capital to grow. This business seems like the type that could be able to return significant amounts of money to shareholders someday. Despite these positive attributes, the company has yet to generate even $1 of profit. In fact, the company has lost billions of dollars in its brief history, and the company itself highlights a key risk in its prospectus by stating that “[Lyft] may not be able to achieve profitability…in the future.” The issue is the barriers to entry in the ride sharing industry are very low. Most people have heard of Uber, a company 3-4x bigger than Lyft; but, there are dozens of other ride sharing companies. It may take many years (if ever) for enough competitors to leave the market to allow Lyft to finally earn a profit. It’s perhaps no wonder that the shares have already fallen 17%, as of April 30, 2019, from the IPO price. Looking ahead to the rest of the year, many more tech companies are hoping to go public, including the aforementioned Uber and the team collaboration company, Slack. We wonder if investors will be able to digest the billions of dollars in new profitless unicorn shares that will be hitting the market soon. We will continue to read and learn about these new companies to see how their business models may impact our portfolio companies; but, we likely will not buy shares. Our process involves owning attractively valued (1), high-quality (2), industry leaders (3) who return significant amounts of money to shareholders (4). We believe unicorns fail on all four metrics.

Noteworthy articles we’ve read:

Business
"Status as a Service"
Eugene Wei’s (long) treatise on social media companies (Facebook, Twitter, etc.) is worth digging into, especially considering how impactful it has become in many industries, including advertising, media, and even politics. Facebook, in particular, has become one of the biggest companies in the world on the back of “network effects,” which occur when a service or good becomes more valuable to existing users as new users are added. In Facebook’s case, when more of your friends join the site, the service is more valuable to you. What makes Facebook a still tenuous investment is that those same network effects can unwind as fast as they are created. If/when users start leaving Facebook, the service quickly becomes less valuable to the remaining users (anyone remember MySpace?). In our opinion, this leaves little margin of safety in a Facebook (FB) investment and keeps us on the sidelines.

Boeing's 737 Max
An article from The Air Current details the many trade-offs that went into the creation of Boeing’s 737 Max. In exchange for greater fuel efficiency and near-term market share, The Air Current believes the company underappreciated some significant safety issues. Time will tell if these trade-offs hurt Boeing in the long-term.

Streaming - Key Players
Streaming, or watching shows and movies via the internet instead of through a cable box or satellite dish, is on the rise. The battle to win new customers is heating up, and this article from The Economist provides a good overview of the key players.

Disney's Strategy
Even more on streaming. Ben Thompson reviews Disney’s recent Analyst Day with the revelation that Disney is playing a different game than everyone else. Due to the ever-increasing ways the company can monetize its devoted fans (theme parks, concerts, branded stores, and more), Disney just needs its streaming service to (profitably) keep the flywheel going. Disney has multiple ways to win in the long-run. That, combined with its attractive valuations, is why Disney is one of our clients’ largest positions.

Science
"The Day the Dinosaurs Died"
An incredible New Yorker review of recent paleontological discoveries related to the day Earth was hit by an asteroid, effectively ending the dinosaur age.

Culture
"Hipsters, RIP"
A fun article from The Economist on words and sayings that have gone out of fashion.

Books we liked:

In this issue, we highlight two books that detail the lives of two of America’s greatest businessmen, Cornelius Vanderbilt and Phil Knight, and the two different paths each man took to create immeasurable wealth.

The First Tycoon: The Epic Life of Cornelius Vanderbilt
by TJ Stiles
In the mid-1800s, Vanderbilt used a cutthroat, knives out strategy to build, first, a steamboat empire and, then, a railroad kingdom that would elevate him to the title of world’s richest man by the time of his death in 1877. Vanderbilt never encountered a price war he didn’t think he could win. He would often flex his market power and scale to lower the price of fares to levels that he believed would drive his competitors out of business, knowing he, the lone survivor, would enjoy monopoly pricing on the other side. One of the most interesting things about Vanderbilt is that despite often being at loggerheads with his friends over a shipping route or various stock schemes, he rarely let business “wars” spill over into his personal life.  - AG
 
Shoe Dog: A Memoir by the Creator of Nike
by Phil Knight
This book is an incredible telling of the story of Nike, and how an ex-accountant turned his passion for running into a $100+ billion company. Knight started his company in the 1960s in the shadow of the German shoe giant, Adidas. Forever cash strapped, the company managed to grow year after year by delighting its customers. The book is a great account of the power of culture and a great team. For young readers, there is an equally engaging children’s edition.  - AG

Dining

Los Angeles
After 20 years as a staple on Sunset Boulevard, Joss Cuisine moved to a very small space at 9919 Santa Monica Boulevard in Beverly Hills (310-277-3888). One thing hasn’t changed; the exceptional gourmet Chinese fare. Outstanding flavors combined with healthy preparation make Joss one of our favorite restaurants in L.A. The elegant, minimalist décor and attentive service add to the experience. This hidden jewel has a can’t miss menu that features fluffy soup dumplings, an amazing Pin Pei Chicken (a whole chicken roasted to perfection) and Organic West Lake Haute Chop Sui (lotus root, gingko nuts, lily bulbs and exotic mushrooms sautéed in a delicate ginger sauce). Joss is not your typical Chinese restaurant.  - BH

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