Lyft (NASDAQ:LYFT) stock continues to plateau as investors try to figure out how to trade the shares. The LYFT stock price has remained in the low $40s per share range for the last two months. Even after the company’s third-quarter results beat expectations, Lyft stock price has not moved much.
However, analysts expect Lyft stock to post losses for the foreseeable future. Until advances in technology change the stock’s outlook, investors will probably not gain significant traction by owning LYFT.
LYFT Still Needs New Technology
If any stock serves as the poster child for the difficulty of investing, it is Lyft stock. As the number two ride-sharing company behind Uber (NYSE:UBER), it can reduce Americans’ need to own automobiles and transform the way they live. From that standpoint, both LYFT and UBER look like slam dunks.
InvestorPlace columnist Luke Lango pointed out that the market penetration of ridesharing was 20% in 2018. By 2030, a number of analysts predict that proportion will rise to 50%.
However, both Lyft stock and Uber stock trade below their IPO prices. The two companies continue to post losses, and analysts do not expect that to change anytime soon. As of now, they are still using conventional cars. However, they plan to ultimately succeed with a technology not yet widely adopted: self-driving cars.
I have stated in previous articles that Lyft will struggle to make money until it adopts self-driving cars. LYFT continues to test self-driving cars in an effort to make that transition. It runs the largest public self-driving commercial program in the U.S. It employs 400 engineers who are testing these cars and have completed over 75,000 rides in them.
LYFT Is Going to Face Increased Competition
As if its current challenges are not enough, Lyft will face additional, serious competition in the self-driving car ride-sharing sector, and not just from Uber. Multiple automakers, including Ford (NYSE:F) and GM (NYSE:GM), continue to test this technology and want to enter the ride-sharing market.
Cost of Revenue Is a Critical Metric for Lyft Stock
Over the near-term, I do not think that Lyft stock will make any headway unless it shows that it can reduce its costs. For now, analysts predict that LYFT and Uber will both generate losses for many more years. However, for Lyft stock, “cost of revenue,” which primarily consists of the cost of compensating its drivers, remains its largest expense.
Investors should pay attention to this metric because, in the last reported quarter, Lyft’s cost of revenue came in at $580.7 million and its overall loss amounted to almost $463.5 million. Lyft’s top line jumped 63.4% year-over-year. But its cost of revenue soared 80% over the same period.
California recently passed a law that could force LYFT to treat its workers as employees instead of freelancers. The legislation will probably increase Lyft’s cost of revenue further. As a result, it’s become even more critical for LYFT to adopt self-driving cars.
I’m not saying that Lyft will completely eliminate human drivers. However, the more drivers it can replace with self-driving cars, the more its expenses will fall.
Final Thoughts on Lyft Stock
Investors need to follow rather than buy Lyft stock. Both LYFT and UBER have become agents of transformation. They will have a direct impact on cities. Their technology could lead to cities that are designed for people rather than cars.
Unfortunately, the process of getting to that point has forced both companies to bleed massive amounts of red ink. Judging by the gradual drop of Lyft stock and Uber stock, investors have lost patience with them. As a result, I think Lyft stock price will continue to sink until LYFT is poised to roll out a massive number of self-driving cars.
Still, once it reaches that point, Lyft stock could go much higher and may even reach valuations that are comparable to high-flying tech stocks. That means investors must have patience to make money from Lyft stock.
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.