Read: Ride-hailing apps are clogging New York City’s streets
How did this happen? Eleven years ago this month, the investment bank Bear Stearns collapsed, ushering in a historic financial crisis and the biggest bailouts the Western world has ever seen. Starting in December 2008, the Federal Reserve slashed basic interest rates to virtually zero, where they stayed until late 2015, in order to jump-start borrowing and lending, and thus economic activity. Even now, despite the Fed’s attempts to “normalize” rates, effective rates are at just 2.4 percent, far below historical averages.
Low interest rates make it difficult for investors to earn decent returns, at least not without taking higher risks. The world’s safest bonds—$10 trillion worth—now offer negative interest rates, meaning investors pay to hold them. As Bloomberg News noted this week, such yields “intensify … the conundrum for investors hungry for returns.” In a normal liquidity crisis, there isn’t enough money in the financial system. In our current liquidity crisis, there’s too much.
Persistently low returns have created a new phenomenon: companies that do not have to earn profits to prosper. Lyft is known for its bright pink-purple logo, and its IPO documents are every bit as cheerful. The company declares that its mission is to “improve people’s lives with the world’s best transportation.”
This is a laudable goal. Let’s look at the first company that tried to accomplish the same task by harnessing the mass-market power of the automobile, around the turn of the last century: Ford. In 1903, “with 12 investors and 1,000 shares,” Ford notes of its own history, “the company had spent almost all of its $28,000 cash investment by the time it sold the first Ford Model A on July 23rd … But by October 1st … Ford Motor Co. had turned a profit of $37,000.” Start-up Ford could not grow unless it proved quickly that it could make money for its investors.
Read: How Lyft’s ride-sharing business works (and doesn’t)
Now let’s return to the Lyft IPO documents. In its offering, Lyft warns its prospective public investors, “We have a history of net losses and we may not be able to achieve or maintain profitability in the future.” Indeed—in 2018, Lyft lost $911 million on $2.2 billion in revenue, a profit margin of negative 41 percent. In the new investment math of liquidity-crisis-era tech companies, this is progress: In 2016, Lyft’s loss was only (!) $683 million; to optimists, the subsequent increase in how much money the company bled just means that its market share is growing.
Lyft’s losses definitely aren’t the result of massive investments in physical assets that will generate a big return in the near future. In fact, Lyft is asset-lite; its total assets are worth just $3.8 billion, compared with the company’s estimated market valuation of more than $24 billion. The company is now investing in bike-share and scooter-share equipment, and it’s building up fleets of cars for its hire-car drivers to rent. Yet it has only just begun to amass the physical resources that most companies need to produce earnings.