Although Lyft (NYSE:LYFT) earned an analyst upgrade in mid-Sept. and three re-iterated “buy” calls, Lyft stock is not yet out of the woods.
Investors grew skittish over the ride-sharing ecosystem since July. Even its competitor, Uber (NYSE:UBER) fell at the same time as markets decided to hold less speculative businesses. What is there to like about Lyft?
The company is smaller ($12 billion) than Uber ($54 billion) by market cap. The most recent second-quarter earnings report gives investors insight into the good and bad reasons to hold LYFT stock.
Strong Q2 Growth
Lyft reported revenue growing 72% Y/Y. its cash levels of $3.3 billion, or around $11 a share, values the company at 3.6 times book. Conversely, investors could hold car companies instead. Ford Motor (NYSE:F) is trading at book value, while General Motors (NYSE:GM), despite the union strike, trades at around 1.25 times book.
Markets clearly value Lyft’s potential revenue growth prospects in the near-term. But weakness ahead lurks: active rider growth rose 41% while revenue per active rider grew 22% Y/Y. This led to an overall adjusted net loss margin of 23%, which is still an improvement over last year’s -35%.
As the company gets bigger, the pace of revenue growth slows. This suggests the market is approaching a saturation point and limits the profit margin expansion. To maximize its operating leverage, Lyft is adding services.
Its efficient Shared Saver ride lets customers get around during rush hour. This Saver program appeals to users who are willing to wait a little longer or walk a short distance. In Q2, Lyft launched Shared Saver in six new markets and is now in nine markets overall.
Lyft added real-time transit data to enable its customers to use public transit effectively while continuing the travel on Lyft’s ridesharing, bikes, and scooters. Its key markets now include New York, Boston, Chicago, San Francisco, and Washington D.C. Lyft’s scooter network benefited from longer battery life and better serviceability. This service is now in 16 markets.
Fast Match is a partnership with local operations that matches riders and picks them up at a designated Lyft pickup area. This service is operating at three airports. And Lux Black and XL now support scheduled rides booked weeks in advance.
Near-term Challenges
With all the business developments implemented, investors must also weigh in the growing operating and support expenses. In Q2, costs grew to 17% of revenue, or $144 million.
Investments in bikes and scooters added to costs but will pay off in the long-term. G&A expenses grew to 22% of revenue. But the EBITDA loss of $204 million in the quarter will scare away investors looking for a profitable growth play.
Lyft forecast Q3 revenue in the range of $900 – $915 million, or growth of 54% – 56% Y/Y. for the full-year 2019, revenue will be $3.47 billion – $3.5 billion, up 61% – 62% Y/Y. Again, losses in the range of $850 million – $875 million will concern LYFT stockholders.
Although the company’s losses are shrinking, it is still bleeding money. Seasonally speaking, October is a volatile and bearish month for stocks. The LYFT stock price is already hovering at 52-week lows. The stock could fall further as investors seek safety.
Robert Johnson, Ph.D., CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University, thinks that the LYFT stock price is driven by speculators.
He is also wary of the obstacles that the company faces. Chief among them are potential regulatory risks. Specifically, whether drivers will be classified as independent contractors or employees of the firm. Currently, drivers are becoming disenchanted with driving for Uber and LYFT as they are finding it difficult to make money after the expenses of the automobile and they aren’t entitled to benefits.
The Bottom Line on Lyft Stock
In a baseline scenario, investors may model a deceleration in revenue over the next five years (per finbox.io). And if EBITDA as a percentage of revenue does not exceed the mid-single digits in that time, then LYFT stock has a fair value that is over 10% below its recent stock price.
A further drop in LYFT stock price is probable if the company continues to report losses beyond the 2019 year. Investors are not happy with the 2022 break-even timeline that Lyft management set.
2019 was supposed to be the peak spending year but Lyft managed to lower spending compared to 2018 levels. EBITDA losses will hurt its share price in the near-term, as investors seek safety and value.
Disclosure: The author owns shares of Ford.
