Here’s Why Lyft Stock Looks Good Ahead of Today’s Earnings Report

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Shares of ride-sharing company Lyft (NASDAQ:LYFT) have had a tough go on Wall Street. The company’s post-IPO honeymoon phase didn’t even last a full day, leaving LYFT stock stuck in a multi-month downtrend.

Lyft Stock: Why The Stock Looks Good Ahead Of Earnings
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The shares showed signs of strength in May, June, and early July. But, late July and early August weakness has plunged LYFT stock back towards its late May lows.

There’s reason to believe that this sluggish LYFT stock trading is about to come to an end, with two big ideas underpinning the bull thesis on LYFT today.

Today’s Forecast: Moderating Margin Headwinds

First, the long-term bull thesis on LYFT stock remains as compelling as ever, given secular growth tailwinds across the entire ride-sharing market and visibility for Lyft to produce huge profits at scale one day. Meaning that in the long run, LYFT stock should run higher.

Second, the one big headwind blocking Lyft from realizing that long-term potential — huge profit issues today — is showing signs of moderating. If it does continue to moderate, near term weakness in LYFT stock will inevitably flow into long-term strength … and soon.

I think Lyft’s Q2 numbers — due after today’s closing bell — will show signs of moderating margin headwinds. If they do, LYFT stock will probably jump big in response to the Q2 print. Positive momentum, improving sentiment, and big long-term potential will subsequently keep LYFT stock on an longer uptrend thereafter.

As such, I think now is the time to get bullish on shares of LYFT. Strong Q2 numbers could breathe life back into this sleepy stock, and put it on a path toward $80.

Lyft has Big Long-Term Potential

The long-term bull thesis on Lyft, much like the long-term case on Uber (NYSE:UBER), starts with one big idea: ride-sharing is in the early stages of a huge, decade-plus growth narrative.

Ride-sharing is the next big thing in transportation. It helps mitigate traffic issues, is cheap relative to the cost of car ownership, and aligns with the global sharing economy trend. As such, ride-sharing penetration as a percent of the global population has gone from 2.8% in 2015, to 5.2% in 2018, and is projected to hit nearly 7% by 2021. This penetration rate will continue to rise, driven by the aforementioned tailwinds and favorable demographics (over 50% of 18-29 year-old consumers in the U.S. use ride-sharing apps).

Lyft is the number two player in this market in the U.S. and Canada. There are around 70 million ride-sharers in those two countries — roughly 20% of the population — and Lyft controls around 30% of the total market, up from ~10% just three years ago. Over the next decade, all of these numbers will move higher. Ride-sharing penetration rates will go up, probably from ~20% to ~50%. Total riders in the U.S. and Canada will subsequently soar from 70 million to around 200 million. Lyft’s market share will rise from 30% to maybe 35%.

That would imply a Lyft rider base of 70 million by 2030. Engagement on the app will also go up. Lyft riders on average only took about 30 rides last year. Americans take 1,500 car trips ever year. Thus, Lyft has very reasonable runway to grow per captia usage by a tremendous amount. Bookings per ride will also go up with inflation and as the market rationalizes. Market rationalization will similarly drive contribution margins higher, while scale will drive the opex rate lower.

Net net, I think Lyft reasonably projects as a 70-million-rider platform by 2030, with nearly $90 billion in bookings, over $30 billion in revenue, and a ~15% operating margin, which should produce around $3.6 billion in net profits. Based a growth average 20x forward multiple, that implies a 2029 valuation target for Lyft of $72 billion. Discounted back by 10% per year, that implies a 2019 valuation target of $27 billion versus today’s market cap of $17 billion.

Q2 Could be the Turning Point in the Lyft Stock Narrative

The counterpoint to the aforementioned long-term bull thesis on Lyft stock is that — even though Lyft may grow riders and revenues by leaps and bounds — margins will remain depressed due to competitive frictions. Profits at scale, therefore, remain elusive.

This bearish take has won broad investor support. Lyft’s margins have been hit hard recently by intense promotional activity across the ride-sharing industry. As margins have been hit, investors have expressed concern over the long term profit road-map. This concern has been the biggest drag on LYFT stock.

But, this could all change with the release of Q2 earnings.

On last quarter’s calls, both Uber and Lyft basically said that they were done with promotions. They both said that the market was rationalizing, and that they would focus on using value — not promotions — to drive growth. Since then, a number of analysts have come out and said that pricing pressures in the ride-sharing industry have significantly moderated. Evercore, Stifel, and Susquehanna, along with many others, have all issued positive reports on Lyft stock over the past few months, citing an improving pricing backdrop.

Consequently, it increasingly appears that the worst of the domestic ride-sharing pricing wars is in the rear-view mirror. It also increasingly appears that pricing trends improved substantially in Q2, meaning that the print will show improved margins. Improved margins will give investors reason to believe that the model at scale can and will produce big profits.

This important investor sentiment inflection could provide a critical turning point in LYFT stock, wherein the stock finally wakes up and hits a long term winning stride.

Bottom Line on LYFT Stock

Lyft stock is a long-term winner. But, it hasn’t hit its long-term winning stride yet. That’s because of persistent profitability concerns. Those concerns should ease significantly over the next few quarters as the domestic ride-sharing market rationalizes. This shake-out will drive improved investor sentiment. In turn, improved investor sentiment will push LYFT stock higher.

Net net, the turning point for LYFT stock could be just around the corner. That’s why I’m bullish on the stock ahead of the Q2 print.

As of this writing, Luke Lango was long LYFT and UBER. 


Article printed from InvestorPlace Media, https://investorplace.com/2019/08/heres-why-lyft-stock-looks-good-ahead-of-todays-earnings-report/.

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