Lyft (NASDAQ:LYFT) stock has not fared well since its IPO last March. Its shares have fallen from a 52-week high of $88.60 per share to $42.97 at yesterday’s close.
Profitability remains years away, making investors skittish, But the growth party is far from over. The company’s sales soared 63% year-over-year last quarter. Its net loss rose year-over-year. But its EBITDA loss, excluding certain items, narrowed YoY.
With the valuation of Lyft stock in-line with that of its competitor Uber (NYSE:UBER), can LYFT stock price climb in the short-term? Not so fast! While ride-share stocks have gone on sale, high expectations continue to be baked into Lyft stock. Here’s why waiting for more reasonable valuations is the right call.
Lyft’s Results Beat Expectations, But LYFT Is Far From Profitable
On Oct. 30, LYFT reported Q3 results that beat analysts’ average sales and profitability estimates. Its Q3 sales were $955.6M, versus the average outlook of $915 million.
The company’s losses were also less than expected. The analyst community, on average, anticipated quarterly losses of 73 cents per share, while LYFT actually lost 41 cents per share. Looking at adjusted EBITDA, the loss fell from $263.2 million in Q3 of 2018 to $128.1 million last quarter.
In Q3 of 2019, LYFT had 22.3 million active riders, up from 17.4 million in Q3 of 2018. Revenue per rider shot up 27% YoY, from $33.63 to $42.82. In Q4, LYFT expects its top line to be similar to that of Q3.
When will Lyft stock be profitable? Analysts like Morgan Stanley analyst Brian Nowak do not expect the company to post positive EBITDA until 2022. But LYFT has more than enough cash on hand to ride out its losses. As of September 30, its unrestricted cash and cash equivalents stood at $3.1 billion.
Morgan Stanley’s Nowak pointed out that the company’s revenues grow faster than anticipated. But Lyft stock faces many risks going into the 2020s.
As we pivot towards a “gig economy,” regulators are looking to protect workers rights. In California, the state legislature passed Assembly Bill 5 (AB-5). AB-5 minimizes Lyft’s ability to classify drivers as independent contractors. Other states could adopt similar laws. On the federal level, the Department of Labor has determined that ride-share drivers are contractors. But if a more labor-friendly candidate ends up winning the White House in 2020, all bets are off.
The Self-Driving Revolution Is Key for LYFT Stock
The key to profitability for the ride-share industry is automated vehicles. Self-driving vehicles eliminate the costs and headaches of a massive force of drivers.
But self-driving technology opens the door to new competition. At this point, Uber and Lyft have been willing to run money-losing services in order to gain market share. Once self-driving cars make ride-sharing profitable, other companies will probably enter the fray.
Alphabet’s (NASDAQ:GOOG GOOGL) Waymo could go from a partner of Lyft and Uber to their competitor. Major automakers like GM (NYSE:GM) and Ford (NYSE:F) could enter the space.
Self-driving fleets are also more capital-intensive. than Lyft’s current business model. There are too many factors at play to make automated vehicles a slam dunk for Uber and Lyft stock.
In addition, much of the potential of self-driving cars is baked into the Lyft stock price. Despite its continued losses, Lyft’s market capitalization is $12.9 billion. While Uber’s market cap of $46.1 billion is much higher, the valuation of both companies is frothy, considering the uncertainty they face.
Uber and Lyft stock trade at similar enterprise value/sales (EV/Sales) ratios. Uber’s EV/Sales ratio is 3.2, while Lyft’s is 3.1. Considering Uber has a stronger brand and a larger market share, why should investors buy LYFT when it has similar risks and a similar valuation? As both companies battle for market share, why go for the also-ran when you can bet on the favorite at similar odds?
Choose Uber Stock over Lyft Stock
When it comes to a ride to the airport, sometimes Lyft is the better option. But when choosing a ride-share stock, Uber may be a stronger play. Both ride-share companies face similar regulatory and competitive risks, but they have similar valuations. In the short-term, both ride-share stocks face uncertainty. Since they are years away from profitability, why bet on them now when they could be cheaper later?
Changing trends are on the ride-sharing companies’ side. But, as shown by their high valuations, everybody knows that. As a result, investors should wait for the valuations of Lyft stock and Uber stock to drop before buying the shares.
As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
