Even before the WeWork fiasco, the IPO market had already been showing signs of problems. Just look at the ride-sharing operators. Both Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock have fallen nearly 40% since their IPOs.
But when it comes to the IPO market, things can turn around quickly. Look at Facebook’s (NASDAQ:FB) IPO. In 2012, the shares had sunk below $20. But that decline turned out to be a tremendous opportunity. FB stock would soon go on a huge rally, climbing above $200 by 2018.
So could the ride-sharing operators go on a similar tear?
Maybe. But I still think it’s not the right time to buy Uber stock or Lyft stock yet. And that’s probably more true for Lyft, which has much fewer resources than Uber.
Here’s a look:
|Market Cap||$45.6 billion||$13.3 billion|
|Cash||$12.7 billion||$3.1 billion|
Because it can access more money, Uber is in a much better position to invest in marketing and next-generation technologies like AI (Artificial Intelligence) to bolster its lead over LYFT. UBER can also make transformative acquisitions.
Additionally, Uber has more than 60% of the U.S. market, increasing its profitability and strengthening its brand. The company also has a massive global footprint. Lyft, on the other hand, is only available in the U.S. and Canada.
But it’s true that Lyft is growing at a rapid pace. In the third quarter, its revenues jumped 63% year-over-year to $956 million. During this period, its revenue per active rider rose 27% to $42.82 (it currently has 22.3 million active riders).
And Lyft has been making progress in reducing its losses, excluding items like interest, taxes, depreciation and amortization. In Q3, its EBITDA was -$128.1 million, versus -$263.2 million during the same period a year earlier. Analysts, on average, had predicted -$206 million.
Unit Economics and Regulation
While LYFT uses ultra-sophisticated algorithms in its app, its business is actually quite straightforward. It’s an ongoing process of trying to provide matches between riders and drivers in the most profitable way possible.
The problem is that algorithms will not necessarily make Lyft’s business strong. On the demand side, Lyft is facing intense competition, which can result in deep price discounts. True, it seems like Lyft has been offering fewer discounts recently. But the phenomenon could easily re-emerge.
But the other side of the equation – the cost of drivers – is the wild card. A new California law could be a huge problem for Lyft and Uber, as it would force them to pay for drivers’ health insurance, payroll taxes and so on.
That could make it tough for them to be profitable and could weigh on Uber stock and Lyft stock price. What’s more, California’s actions may spur similar moves by other states.
What about self-driving cars? Won’t they help Uber stock and Lyft stock? They would definitely be positive for the stocks. But the technology has been progressing slowly, It seems highly unlikely that self-driving cars will help Lyft stock price in the next few years.
The Bottom Line on Lyft Stock Price
While Lyft’s growth rate remains strong, that already appears to be factored into the valuation. Keep in mind that Lyft stock trades at roughly four times the company’s sales. By comparison, Uber is trading at 3.5 times the company’s sales.
But again, there is quite a bit of uncertainty about Lyft’s business model because of adverse regulations. In other words, there could easily be a ceiling on Lyft stock price until its outlook becomes more certain.
Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical Introduction. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.