As Profitability Becomes More Likely, Lyft Stock Is Worth Buying Here

Increase in ride prices is likely to help Lyft stock in accelerating profitability

It’s been a disappointing year for investors who have bought into the initial public offering of two transportation-service companies. Lyft Inc (NYSE:LYFT) and Uber Technologies (NYSE:UBER) are both down by nearly 38% since the IPO. However, I believe that 2020 and beyond might be better for Uber and Lyft. In-sync with this view, Lyft stock is worth

As Profitability Becomes More Likely, Lyft Stock Is Worth Buying Here
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The first reason to be positive about Lyft stock is financial developments. For the third quarter of 2019, Lyft reported revenue of $956 million, which was higher by 63% on a year-on-year basis. Importantly, the company’s adjusted EBITDA margin improved by 32% in 3Q19 as compared to 3Q18. Adjusted EBITDA margin is still at a negative of 13%, but there is an improvement in operating metrics.

Another important point to note is that for year-to-date 3Q19, Lyft reported cash used in operating activity of $60 million as compared to cash used of $148 million for YTD 3Q18. Therefore, Lyft is gradually moving towards positive operating cash flows.

With $3.1 billion in cash & equivalent, Lyft is positioned to navigate through the cash burn phase. Considering the current cash buffer, I don’t see need for further equity dilution in the next 24 months.

Clear Path to Profitability

When Lyft reported 2Q19 results, the company’s chief financial officer Brian Roberts said, “We believe we have a clear path to profitability.”

Further, when the company reported 3Q19 results, it added another note on profitability: “[W]e now expect to be profitable on an Adjusted EBITDA basis in the fourth quarter of 2021.”

I do believe that profitability is coming in the next eight quarters and as operating metrics improve, Lyft stock price should trend higher. To elaborate, Lyft reported revenue per active rider of $42.82 in 3Q19 as compared to 3Q18 revenue of $33.63. Growth in revenue per active rider is the first factor to believe that Lyft is moving towards profitability.

Be it Lyft or Uber, there needs to be an increase in pricing if there are any chances of profitability. Lyft has already taken a step in that direction. The company’s “price adjustments” have started in June and the growth in revenue per active rider is a reflection of that adjustment.

It is important to note that higher fares in 2020 and beyond is unlikely to impact market share. Uber has also been bleeding and fare hike is inevitable. Therefore, the industry is likely to move towards a relatively higher fare structure in the coming quarters.

I am confident about higher fares as the rideshare industry is dominated by Uber and Lyft in the United States. As of October, Uber had 69.7% market and Lyft reported 28.8% market share. Both companies are listed with cash burn and a disappointing stock performance since the IPO. It is likely to be an unsaid agreement between the rivals to increase fares to survive and restore investor confidence.

Prefer Lyft Over Uber

If I had to choose between Uber stock and Lyft stock, I would prefer exposure to the latter.

The primary reason is that Lyft is focused on the North American markets. On the other hand, Uber is present in over 60 countries with a more diversified business model.

I am not suggesting that global expansion or revenue diversification is a negative. However, I like the focus with which Lyft is operating and it has resulted in steady market share growth.

On the other hand, Uber’s valuation is impacted by cash burn on account of diversification. As an example, Uber reported (3Q19) its eighth positive adjusted EBITDA in the rides segment. However, the company’s consolidated adjusted EBITDA remains negative and cash burn has accelerated in 2019 as compared to 2018.

My Final Thoughts on Lyft Stock

I believe that Lyft stock is worth considering in the range of $40 to $45. The company’s adjusted EBITDA margin is likely to improve further in the coming quarters. In particular, as the company pursues gradual price adjustments.

The year 2019 might have been disappointing for Lyft investors. But I do believe that Lyft stock will provide investors with a reason to cheer in 2020.

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

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