Should Contrarian Investors Buy Lyft Stock Now Following Post-Results Dip?

Ride-hailing LYFT stock is likely to be volatile as concerns over absence of profits continue

Ridesharing company Lyft (NASDAQ:LYFT) closed October with the release of third-quarter results that showed smaller than expected losses. However, for Wall Street the numbers were not impressive enough to give the LYFT stock price a much-needed boost.

Should Contrarian Investors Buy Lyft Stock Now Following Post-Results Dip?
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Many of our readers may remember that made Lyft its public market debut in March at an opening price of $87.24 and reaching $88.60 the first day of trading. Now the stock is hovering around $42, down about 6% from the Oct. 31 earnings release, compared with a 2% gain in the Nasdaq Composite index in the same intervening weeks.

As we approach the final month of the year, investors are wondering whether now might be an opportune time to buy into Lyft shares. I do not expect to see much momentum in Lyft stock in the coming weeks. Rather, the shares are likely to trade in a range, possibly between $40-$47.50.

How Lyft Stock’s Q3 Earnings Came

The global ridesharing market is expected to grow from about $61 billion in 2018 to $218 billion by 2025, about a 20% annual growth rate

In the U.S. there are two major players in the ride-hailing market: Uber Technologies (NYSE:UBER) and Lyft. Both aim to put put riders in contact with self-employed drivers via their algorithm-driven mobile apps.

This year has reminded many investors that investing in IPOs can indeed be risky, especially when the so-called unicorns go public. Lyft is part of the “gig” or “on-demand” economy that uses technology and apps to employ contract workers to offer various services. In 2018, Lyft, which was launched in 2012, was valued at about $15 billion. The company’s market cap now stands a few shekels north of $12 billion.

LYFT stock’s third quarter revenue grew to $956 million, up 63% YoY. Analysts were expecting $915 million. The per share loss came to $1.57 vs. $1.66. However, analysts noted that the improved metrics were mostly due to decreased marketing costs.

Following the quarterly results, Lyft stock was initially choppy as investors scrutinized the numbers that showed no earnings in sight yet. Since then, the stock price has been calmer as the stock has stayed in a tighter range.

LYFT Stock Operates in a Competitive Market

With about 22.3 million monthly active riders, mainly in the U.S. and Canada, Lyft has now become a strong competitor to Uber. The company claims it has about one-third of the U.S. ridesharing market.

Yet, there has been considerable negativity surrounding the industry as investors are wondering if the segment can be sustainable in the long run. Both Lyft and Uber are facing calls to increase pay and provide better working conditions for drivers.

Several recent studies have concluded that although “digital labor” may be called different names such as gig or “sharing” economy, it is nonetheless human labor that comes with contracts, responsibilities, and rights. Indeed, in September, California passed a landmark law that could soon open the door to classify contractors as employees and to regulate companies like Uber and Lyft.

Drivers, who would be classified as employees, could soon be eligible for minimum wage as well as various employment benefits, such as paid time off.

Recent dissertation research by Ruotong Wang at Macalester College concludes that “[the] use of algorithmic management might intensify the exploitation in the labor process. On a micro level, the work assignment algorithm, which is widely adopted in the gig economy platforms, appears to be optimized based on a supply-demand relationship but fails to address workers’ feeling and pace of work.”

A legal battle has already started in California courts. The result may see increased costs for companies like Lyft and Uber.

LYFT Stock May Face Further Short-Term Headwinds

Lyft is not yet a profitable company. In 2018, it lost over $900 million. In Q3 2019, its net loss was $463.5 million versus an a loss of $249.2 million in the same period a year earlier.

Management in part put the blame on the stock-based compensation payment as well as taxes related to its March IPO. And these losses are occurring even though the ridesharing company takes a considerable percentage of a driver’s income and tips.

If Lyft management decides to pay independent drivers more money or if drivers indeed become company employees as a result of legal developments, then Lyft might have to increase passenger fares to cover the difference in costs. Or it might have to decrease the percentage it takes of the ridesharing revenue. And either decision could end up hurting Lyft’s financial performance.

In simple terms, Lyft stock has to increase revenue … and fast. Management expects LYFT’s Q4 projected revenue to be between $975 million and $985, which exceeds Wall Street’s expectations for $943 million. If however, there is an economic slowdown in the U.S., the owners of LYFT stock may feel that the company will face tough headwinds in the coming months.

Increased legal pressures may also put more pressure on Lyft’s earnings. Then Wall Street may not be forgiving of high-growth, cash-burning business models.

The shares of younger, rapidly growing companies are far more volatile than market indexes or mature companies. Whenever investors feel the growth of these companies could be slowing, they sell the stock first and ask questions later. As a result, the volatility and even the downtrend on LYFT stock may continue.

Short Interest and LYFT Stock

When more than 20% of a stock’s float (available shares) is shorted, then even a small rise in its price could actually become a powerful short squeeze and propel the stock much higher.

Some 8% of LYFT stock is currently shorted. So although there are plenty of traders who have bet against Lyft stock, the number is not yet enough to set the stage for a massive short-squeeze rally. I’d argue that, in the coming weeks, short-selling of LYFT stock may increase and put further selling pressure on the shares.

In the meantime, any negative industry news or specific developments for main rival Uber, then LYFT shares may be affected, too.

Finally, the short-term charts indicate that investors should be cautious on LYFT stock. Since the decline started in March, LYFT stock technical charts look weak. The shares will need to build a base before a sustained rally can take place. Therefore, in the next few weeks, Lyft shares are likely to trade between $40-$47.5.

Should Investors Buy Lyft Stock?

For most long-term investors an IPO generally means that the company in question will likely move toward profitability soon. Yet Lyft stock has been in a free-fall since going public, signaling an over-inflated and even broken IPO.

Although the Lyft stock price has about halved since going public, it’s likely to continue to be volatile as we get ready to end the year.

Investors who don’t yet have a position in LYFT stock may want to wait for Q4 results expected in January 2020 before buying the shares. The report may also show that the group still has a lot to prove to not only investors but also to regulators, drivers, and consumers. Lyft stock will become attractive as it moves toward the $40 or even $35 level.

Current owners of Lyft stock may also consider hedging their positions. For hedging strategies, covered calls that expire on Jan. 17 could be appropriate. Such a hedge would offer some downside protection as well as the opportunity to participate in a potential up move.

The two important points to remember are that the trend is an investor’s friend and that LYFT is a volatile stock. Long-term investors should be ready to hold Lyft shares for several years.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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