InvestorPlace contributor Vince Martin recently wondered what it would take for Lyft (NASDAQ:LYFT) to break out of its slump. Despite a flawless performance over the last three quarters, Lyft stock has continued on a downward spiral from its March IPO.
Investors remain concerned about its pathway to profitability.
At the moment, it expects to hit EBITDA profitability by the end of 2021, but if you only work with GAAP numbers, that extends out to 2023. Naturally, that’s been a big headwind for America’s second-largest ride-hailing app behind Uber (NYSE:UBER).
It turns out that Barclays Capital might have an answer to Lyft’s problems.
Recently, it analyzed 2.4 billion taxi and ride-hailing trips in New York City to get a better grip on when Lyft would become profitable. What it found out might surprise you.
Higher Prices Wouldn’t Hurt Lyft
After looking at the data, analysts Jeffrey Meli, Adam Kelleher, Ryan Preclaw, and Ross Sandler found that if Lyft raised prices for its rides, volumes would only drop by a small amount, while the extra revenue would help it generate an operating profit.
As an interesting aside, the analysts found that the introduction of ride-hailing services into the least gentrified areas of New York City actually increased the number of rides taken in those neighborhoods, suggesting that companies such as Lyft and Uber are actually making a positive contribution to society by adding to transportation infrastructure.
Social messages aside, let’s consider the numbers based on Barclays’ suggestion higher prices won’t dramatically hurt volumes.
Lyft’s Latest Quarter
At the end of September, Lyft had 22.3 million active riders. It generated $42.82 in revenue per active rider, $9.19 more than in the same quarter a year earlier and $3.06 greater than in the second quarter.
It defines active riders as follows:
“We define Active Riders as all riders who take at least one ride on our multimodal platform through the Lyft App during a quarter. An Active Rider is identified by a unique phone number. If a rider has two mobile phone numbers or changed their phone number and such rider took rides using both phone numbers during the quarter, that person would count as two Active Riders.”
While Lyft doesn’t reveal the total number of rides taken in a quarter, the active rider statistics give us a good idea.
Let’s assume that the average Lyft ride costs $12.53. I’m using a figure for 2015, but I would doubt the figure’s changed dramatically given both ride-hailing apps have been elbowing for market share.
This means that the average active rider might take 3.4 trips per quarter using Lyft. Based on this average, let’s assume that the average cost of a Lyft ride is increased by 20% from $12.53 to $15.04. Let’s also assume that this reduces the number of trips taken by 5% from 3.4 to 3.2 per quarter.
So, if the number of active riders remains the same at 22.3 million, the revenue per active rider increases to $48.13 from $42.82, and Lyft’s total revenue increases by 12.3% in the quarter to $1.07 billion from $955.6 million.
In the third quarter, Lyft had an operating loss of $490.9 million. Subtract the $117 in additional revenue from the 20% increase in the cost of the average Lyft ride and you start to see a pathway to profitability.
What Does This Mean for LYFT Stock Price?
One thing my back-of-the-napkin calculation didn’t take into account is the many ways in which Lyft is working to boost its margins.
For example, the company’s contribution margin in the third quarter was 50%, 500 basis points higher than in the same period a year earlier. Should the company continue to increase the contribution margin, operating profits would most certainly come sooner.
In October, I argued that given there were plenty of companies already making money with revenues similar to Lyft’s, this reality made LYFT stock a poor second choice.
And as I stated back then, while analysts love Lyft, I don’t.
That said, the Barclays analysts make a very good argument, and while I still wouldn’t own it, that doesn’t mean you shouldn’t.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.