Ride-sharing operator Lyft (NASDAQ:LYFT) has had a jerky ride since its initial public offering in late March. On their first day of trading, the shares posted a muted increase of 9%. Then the LYFT stock price would quickly go into a tailspin, dropping from $78 to $48.
Since then, the shares have been in the rally mode. Yet Lyft Inc stock is still down 9% from its offering price. No doubt, this kind of volatility is normal for IPOs, especially for companies that are trailblazing new market opportunities.
For the most part, the strategy at Lyft is to focus on growth over profits. And this was certainly evident in the latest earnings report. Revenues soared by 95% to $776 million and there was a 46% jump in the number of active riders to 20.5 million (it does look like the IPO did provide a strong boost to the results).
On the other hand, Lyft reported a massive $1.1 billion loss. While a big chunk was from non-cash compensation charges, the adjusted loss was still $211.5 million.
Now I think the growth strategy is the right approach. But then again, markets can get fickle. Besides, there remain some notable risks with the LYFT stock price.
Legal and Competitive Issues Pressure Lyft Inc Stock
Perhaps one of the biggest risks with Lyft stock is the potential regulation. We are getting a taste of this from California. Note that the state Supreme Court has handed down an ominous decision, setting forth the elements for determining the difference between an employee and contractor.
Basically, to be a contractor, a person must operate outside the control of the employer. Further, that individual must be outside the scope of hiring. Essentially, such people are running a business.
All this is critical for Lyft Inc stock, since the company’s business model relies on the flexibility of using labor in dispatching rides. More importantly, they’re not assuming the added costs of employment, such as healthcare, tax withholding and so on.
Well, interestingly enough, the California legislature is evaluating a bill called Assembly Bill 5 to institute the requirements (the vote is for Sept. 13). If it passes, it will certainly have an adverse impact on LYFT stock as the company has a large presence in the state. More importantly, other states may look at this approach as a model for their own regulations.
Yet this is not the only major issue for Lyft Inc stock. Consider that the U.S. market is highly competitive. Rival Uber (NYSE:UBER) has 70% of the U.S. rideshare market, compared to 28% for Lyft (this is according to credit card transaction data from Second Measure Inc).
Uber also has the advantage of more financial resources. For its own IPO, the company raised $8.1 billion. Lyft, on the other hand, raised about $2.3 billion. In other words, Uber has the wherewithal to survive sustained pricing competition.
Bottom Line on LYFT Stock
So, what about autonomous cars? Won’t they be huge for Lyft stock? This is true. It would transform the ridesharing business in terms of lower costs and efficiencies. What’s more, Lyft has already made some important moves in the category, such as with a partnership with Alphabet’s (NASDAQ:GOOGL, NASDAQ:GOOG) Waymo, which has developed a robot taxi service in Phoenix.
Despite this, the likelihood of full autonomous cars appears to be far off. According to a post in the New York Times, manufacturers like GM (NYSE:GM) and F (NYSE:F) have been less sanguine about the prospects.
One of the key issues with the AI is the complexity of anticipating what might happen, say, with a pedestrian or a nearby car. The possibilities are mind-boggling. Granted, a system could be programmed to be cautious, but this would result in a very slow car!
However, such things are more long-term concerns. On the other hand, investors actually do not seem too troubled. With the markets very much in bullish mode — especially with next-generation tech companies — there will likely be continued gains with Lyft stock as the growth will probably continue.
Tom Taulli is the author of the upcoming book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
