Lyft (NASDAQ:LYFT) has presented a conundrum to investors. The rideshare industry could dramatically influence how Americans get from point to point. However, the LYFT IPO turned into a huge disappointment as Lyft stock has fallen almost 30% from its IPO price.
Shareholders also have to contend with the end of a lock-up period on some insider shares. Given current conditions, I do not see much of a near-term lift for Lyft shares.
However, a shift in technology promises to significantly improve the profit picture for the company. If Lyft can work through the near-term concerns, I think it heads much higher in the future.
LYFT Can’t Gain Traction
For now, the struggles continue for Lyft stock. It got an initial boost when it beat earnings on August 8th, the day after the company announced its earnings and revenue beat for the second quarter. However, that one-day rally reversed course quickly. Now LYFT continues its descent back to the sub-$50 per share lows it last saw in mid-May.
This move does not surprise me as I see a lot of worries. For one, InvestorPlace contributor Ian Bezek mentioned that EBITDA losses increased from $190 million to $205 million between the first and the second quarter. He states (I think correctly) that the economies of scale that come with a larger size have now appeared for either Lyft or Uber.
Also, the lock-up period on almost 258 million shares expired on Aug. 19. So far, the price has fallen only modestly. However, I think this will serve as a test of the $47.17 per share 52-week low that Lyft stock established. If that low fails to hold, LYFT could face further pain.
Thus far, Lyft has made its way by becoming to Uber (NYSE:UBER) what Target (NYSE:TGT) is to Walmart (NYSE:WMT). It is the domestic competitor successfully going head to head with a larger, international peer.
I do not see an existence as the “Target of the rideshare industry” as a bad thing in itself. However, both Target and Walmart remain consistently profitable. Positive earnings remain elusive for both rideshare leaders.
TheFuture Looks Bright for Lyft
As I stated in a recent article, both Uber and Lyft follow the Netflix (NASDAQ:NFLX) model to success. They establish a name for themselves utilizing an old technology.
Once the new technology (self-driving cars in this case) sees wide adoption, they can both dramatically reduce their largest cost (labor) and turn a profit. Even better, self-driving vehicles will likely manifest a class of customers willing to pay a premium to keep their human driver.
I think this makes Lyft stock an eventual buy. Once widespread adoption of self-driving cars becomes a reality, I see both Lyft and Uber rising dramatically. The problem comes with knowing when to buy.
Lyft Has Too Many Headwinds
LYFT currently trades at 5.2 times sales. I see that as reasonable for a high-growth stock. However, for now, I’m worried about the effects of having 258 million more shares on the open market.
As our own Dana Blankenhorn mentioned, Lyft had about 273 million shares outstanding before the lock-up period ended. Investors need first to see if $47 per share constitutes an actual floor. Having nearly double the number of shares on the market dramatically reduces the odds of that price point holding.
They also need to keep one eye on the overall economy. The inverted yield curve, along with the almost 11 years of economic expansion worries investors. A recession would make it easier to find drivers but more challenging to attract customers.
Also, even if a recession does not occur, the worry alone can spook the stock market. While a recession could ultimately create a buying opportunity for Lyft, equities tend not to command premium prices under such conditions.
The Bottom Line on Lyft stock
Lyft looks poised to bring short-term pain and long-term gain. For now, LYFT looks like a stock to avoid. The company has struggled with economies of scale.
Also, the dramatic increase in shares available could place further pressure as the market must absorb a greater supply of shares. Moreover, a possible recession could reduce the demand for LYFT shares and its services for that matter.
However, the advent of self-driving cars will reduce the cost of labor and provide a path to profitability in the rideshare business. I see this phenomenon taking Lyft stock much higher at some point, but not just yet.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
