Lyft (NASDAQ:LYFT) stock has had troubles since going public in March. Shares are down ~18% from the IPO price of $72/share. Lyft continues to generate large operating losses. With the IPO lockup period ending August 19, more than 257 million restricted shares will be available for sale. This could lead to continued downward pressure on LYFT stock. Rival Uber (NYSE:UBER) continues to look like the stronger ride-share play.
Does Lyft have a path to profitability in the short-term? Is the stock a buy for investors looking to gain exposure to the ride-share revolution? Let’s have a look at the potential for upside in the LYFT stock price.
LYFT announced earnings on August 7. Second quarter revenue was up 72% year-over-year. But the company’s net loss was $644.2 million, up from $178.9 million in the prior year’s quarter. This was mainly due to IPO-related expense recognition of restricted stock units (RSUs). Excluding non-cash charges, the company’s adjusted net loss was $197.3 million.
For the full year, the company increased their revenue guidance. The company increased projected revenues from a range of $3.28 billion-$3.3 billion to a range of $3.47 billion-$3.5 billion. The company anticipates lower losses for 2019, still far away from achieving profitability.
With Uber also operating in the red, the ride-share industry remains unprofitable. Both companies offer incentives to maintain the number of drivers on their platforms. Along with marketing and overhead costs, it’s no wonder both companies lose money. With this in mind, what catalysts are in play to move the Lyft stock price?
Will Ride-Share Companies Make Money?
The path to ride-share profitability requires the end of traditional taxis. The taxicab business used to be a license to print money. In markets such as New York and Chicago, cabs are regulated via a medallion system. Taxi owners must purchase a license (a medallion) in order to operate. Before the rise of Uber and Lyft, medallions were a hot asset. Now with ride-share companies pushing a race to the bottom, taxicab medallions are going for fire-sale prices.
America’s large cities are moving to regulate the ride-share industry. New York capped the number of ride-share drivers until August 2020. Chicago has yet to impose a cap, but will likely pursue some sort of limits. With the most profitable markets (densely populated cities) putting up barriers, what is the ride-share space’s next move?
Autonomous cars could be the answer. Lyft made it clear that autonomy is the way of its future. It’s putting in place the building blocks of that future with its Waymo and Aaptiv partnerships. With self-driving cars, both companies would eliminate labor costs. But ride-share automation would have widespread effects on society. Governments will not be too thrilled at a move that causes significant job losses.
In addition, people still have safety concerns regarding self-driving cars. Until then, it will be a fight to the death for both major ride-share companies. With Uber spreading its bets widely compared to pure play Lyft, Uber stock may be the stronger play in the ride-share industry.
Lyft Stock vs Uber Stock: What’s the Better Buy?
With a lack of operating earnings, it’s tough to compare LYFT stock and UBER on valuation. But both trade at similar enterprise value/sales (EV/Sales) ratios. LYFT’s EV/Sales ratio is 5x, compared to 5.1x for UBER. With both stocks trading at similar valuations, qualitative factors may help investors make a choice.
Uber has worldwide exposure, with operations in multiple countries. Uber also operates in multiple industries within the United States. As InvestorPlace contributor Josh Enomoto discussed on Aug. 9, Uber Eats helps drive customers to the ride-share business. This synergy is missing from Lyft’s operations. Uber’s scale and diversification provide a clearer path to success. However, most of Uber’s upside may be priced into the stock. In the case of the LYFT stock price, there may be greater room for upside.
As InvestorPlace contributor Luke Lango pointed out last week, the ride-share market has room to grow. Based on his analysis, the company could one day generate ten times its current annual revenue. Assuming healthy operating margins, the company would be a cash cow. This provides long-term upside to the LYFT stock price. However, this growth requires capital. The company has just $3.3 billion in cash on hand, compared to Uber’s $11.7 billion war chest. The company will likely need diluting capital raises in order to sustain operations. This minimizes the stock’s upside potential.
Bottom Line: Lyft Stock Remains a Gamble
LYFT stock is highly speculative. Ride-sharing remains a commodity business. With Uber having enough of a war chest to fund a price war, LYFT needs equity infusions to survive. But this will negatively impact the LYFT stock price due to dilution. While the potential is there, the risks outweigh the upside. The specter of restricted shares becoming available for sale is another negative short-term factor. With other growth opportunities out there, investors are better off skipping LYFT stock.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.