Ride-hailing, Fracking, Capital Hunger, And Future Profits

Morning Markets: I’m a bit jet lagged, but walk with me. We’re talking endless fundraising and growing losses.

The world’s ride-hailing companies need more money.

The revolution that Uber kicked off and a host of startups around the world are racing to complete is a cash-hungry business. Happily for the founders in the space, the business of ride-hailing generates one thing that investors do covet, namely growth.

And that spells big investment dollars. Uber and Lyft have raised billions apiece. Didi and Ola have raised billions apiece. Go-Jek and Grab have raised billions apiece. And none of them, so far as I can tell, generate profit. Indeed, the collection of companies are neck-deep in losses, deficits that show few signs of drying up.

And that means that the group of companies needs more money. And they are out to get it. Lyft’s IPO is set to raise $2 billion, we recently learned. That’s a fraction of the company’s raise-to-date, but is still a staggering sum of money for a company whose competitive edge seems to be its brand.

And even more, recent news has Ola, the India-based ride-hailing leader, raising another $300 million. You’ll forget about the Ola round by lunch. After all, it’s just another few hundred million into a regional ride-hailing shop. It’s not like it’s a big deal.

More notable than simply the titanic sums of capital that the ride-sharing world has raised is how far it remains from making money. The ever-excellent Shira Ovide tweeted something this morning from the Lyft IPO roadshow:

Note that at some point in the future Lyft expects its “Adjusted EBITDA Margin” to reach 20 percent. That’s pretty slack, and the news gets even worse. Here’s more from Ovide:

I had to *really* squint to read the footnotes. “Adjusted” Ebitda excludes: depreciation and amortization, stock pay, charges to insurance reserves, acquisition related costs, income taxes and interest. Ok!

In short, Lyft will, at some point in the future yet to be determined, generate 20 percent profit margins on its revenue, provided that we exclude an incredible slurry of material, GAAP costs from the calculations. The only way I can read the chart’s figures and its explainer text is that Lyft expects to never make money, and it wants you to know it.

A 20 percent operating margin would be mildly ok. It’s certainly not software-like performance, but Lyft could be big, and thus the profit material. But if your fake profit metric that strips out real costs only gets you to a 20 percent clear at some point, you aren’t going to have much profit at all, measured using normal metrics.

And this company wants $2 billion more? After it has already raised $4.9 billion?

Fracking

A huge industry that can raise untold billions, whose profits are always out in the future? Ride-hailing isn’t the only game around when it comes to those terms. There’s also fracking.

The Lyft situation reminds of a book I read last year, Bethany McLean’s Saudi America, which digs through the American oil boom. I dug up a passage that should sound somewhat familiar:

[Famous investor David] Einhorn’s firm looked at the financial statements of the sixteen largest publicly traded frackers, which included companies like Pioneer and EOG. Einhorn found that from 2006 to 2014, the fracking firms had spent $80 billion more than they had received from selling oil and gas. Even when oil was at $100 a barrel, none of them generated excess cash flow–in fact, in 2014 when oil was $100 for part of the year, the group burned through $20 billion.

Yep.

If the fracking world will ever actually generate enough return to make the capital it ingested sensible isn’t clear to me, and I don’t claim to know the answer (McLean’s notes on the fast decline in output from fracking wells seems to indicate that the answer is no). But the concept of a hugely popular investment into a field that is quite disruptive but may never actually make money is therefore not unique to any one industry.

Uber, of course, loses even more money than Lyft. Didi, Uber’s old China-based rival, is struggling. And offshoots of the ride-hailing boom, namely scooters and bikes, are suffering as well. But, probably, none of this is enough to slow the Lyft IPO.

And with $2 billion more (or $300 million more for Ola, or whatever Uber will raise in its own flotation later this year), Lyft can keep growing. Just to what end I don’t find entirely clear. And from the above Lyft slide, perhaps it doesn’t either.

Illustration: Li-Anne Dias.