Up to this point, Lyft’s (NASDAQ: LYFT) IPO has been a major flop. Lyft stock is trading more than 22% below its $72 IPO price. To make matters worse, investors will soon get a larger, better ridesharing alternative when Uber hits the market.
I was pretty bearish on LYFT stock during its over-hyped IPO. But that doesn’t mean there’s not a bull case for ride-sharing stocks. In fact, LYFT stock can still turn out to be the long-term investment opportunity of a lifetime. All Lyft needs to do is answer three simple questions for investors in the affirmative. Unfortunately, those three questions are more difficult than they may seem.
Will Ridesharing Change Transportation?
Those who are bullish on LYFT stock are extremely confident the answer to this first question is, “yes.” Lyft has already reported some impressive growth numbers so far. It doubled its revenue in 2018, and research firm D.A. Davidson projects its revenue will jump by another 56% in 2019.
However, for LYFT stock to be a true can’t-miss, long-term investment, ridesharing will need to be more than just the taxis of the 21st century. Lyft needs ridesharing to facilitate a shift in the way people think about transportation. The rise of ridesharing and autonomous-vehicle technology could potentially shift the personal transportation model away from vehicle ownership over time. To do so, ridesharing will need to be part of travelers’ daily lives on weekdays and outside of large cities.
The average American household currently owns 1.94 vehicles, according to research firm Raymond James. As vehicle prices continue to rise, analyst Justin Patterson says ridesharing names like LYFT stock have a chance to eat into auto sales as well. Raymond James estimates that less than 15% of consumers typically use ridesharing at least once a week. Less than 5% use taxis, which is a testament to the success of the ridesharing model up to this point. However, roughly 85% of consumers still use personal household vehicles. For Lyft to realize its full disruptive potential, that 85% household vehicle use needs to come down significantly.
Is There Room For Two Ridesharing Giants?
If you’re bullish on ridesharing, then you are likely bullish on LYFT stock. Of course, there is also the elephant in the room. Namely, Lyft is not the market leader.
Even after operating at steep losses to gain ridesharing market share, Lyft’s share of the market is still under 40% , according to D.A. Davidson. Research firm Guggenheim estimates that Uber’s U.S. business generates 136% more bookings than Lyft, 119% more trips than Lyft and 185% more revenue than Lyft. Uber also has the most recognizable ridesharing brand and enjoys the type of first-mover advantage that is difficult to overcome. At this point, Lyft’s services aren’t particularly differentiated from Uber’s, making it difficult to convert existing Uber customers.
In other words, Uber is the gold standard in ridesharing until Lyft proves otherwise. It may be impossible for Lyft to ever make up that ground and meet or exceed Uber’s market share. However, most of those who are bullish on LYFT stock likely believe the company doesn’t have to beat Uber to succeed.
If the transportation industry really is undergoing a shift away from household vehicles, there will be plenty of pie for multiple winners to split. In fact, Raymond James estimates the total addressable transportation market in North America is a $2.6 trillion opportunity. Even if Lyft captures only a small fraction of that market, its business will be booming and the owners of LYFT stock will be extremely happy.
Will Lyft Ever Generate a Profit for Investors?
I can easily see the answers to the first two questions above being “yes.” This third question is the one that makes me want to avoid taking a ride with LYFT stock.
Lyft reported a $687 million loss in 2017 and a $911 million loss in 2018. As the company’s business grows, it’s losing more money. That’s not a good trend.
Raymond James’ Patterson is optimistic that Lyft can turn the corner at some point.
“Lyft has significant ability to leverage fixed costs and reduce variable costs (e.g., insurance, hosting, and payment processing) to realize a 20%+ EBITDA Margin,” he says.
Unfortunately, this is a leap I’m simply unwilling to take as an investor. I can see ridesharing being huge because it is trending in that direction. I can see Lyft being a competitive second to Uber because it is trending in that direction. However, I can’t see a path to profitability based on the trends in Lyft’s financials up to this point. Sure, those trends may change as the company ‘s business grows. But that is a bet I’m unwilling to take at this point in time.
There’s certainly a bright future for the owners of Lyft if everything falls into place. At this point, however, there are simply too many unanswered questions to be reasonably bullish on LYFT stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
