Had investors known in advance how good Lyft’s (NASDAQ:LYFT) results would be in 2019, they likely would have bought Lyft stock hand over fist. At least relative to Wall Street analysts’ average expectations, Lyft has posted three consecutive blowout quarters. And yet the Lyft stock price has declined steadily since the company’s late March initial public offering.
There are two ways to look at that seeming contradiction. The first is that the market hasn’t paid close enough attention to Lyft’s performance. More than a few investors seem to see it that way at the moment. Lyft stock has bounced 19% from its October lows.
The second is to wonder whether the weakness of Lyft stock simply means its IPO price was too high or whether there are structural problems with the ride-sharing business. That’s largely the opinion I’ve had, but I’ll admit to having some second thoughts.
Lyft’s Blowout Earnings
The first three quarters of Lyft’s 2019 have been impressive. Its revenue has increased nearly 75% year-over-year through the first nine months of 2019. The company’s guidance suggests that its top-line growth will decelerate to 45% in Q4, but LYFT still expects revenue growth of 66% for the full year.
Admittedly, Lyft remains unprofitable and will stay that way for a while. The company said on its Q3 earnings conference call that it planned to reach adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) profitability in Q4 of 2021. Given its still-substantial stock-based compensation, LYFT may well not turn a “true” net profit until 2023.
Still, that’s not necessarily a surprise. When Lyft’s IPO priced at $72 and LYFT stock price briefly jumped to $88, investors weren’t expecting near-term profits. They likely weren’t expecting 60%+ growth this year, either. In fact, analysts’ average revenue estimate heading into the Q1 report in May projected a top-line increase of just under 50%.
And while profitability is distant for LYFT, its losses have narrowed. The company’s adjusted EBITDA margins in Q3, for instance, improved a stunning 25 percentage points year-over-year. And that’s while it’s still losing money on businesses outside its core ride-hailing operations, such as scooters.
LYFT still has a lot of work left to do to become profitable. But by any measure, it has surpassed all but the most bullish projections in 2019. And yet that performance has done nothing for Lyft stock, which still trades over one-third below its IPO price.
Lyft vs. Uber
What’s particularly surprising is that Lyft stock actually has done worse than its rival, Uber (NYSE:UBER), at least relative to their IPO prices. Since the companies’ IPOs, Lyft stock has dropped 37.4%, against a 36.3% decline for UBER.
To be fair, the tepid reaction to Lyft’s IPO likely dampened UBER’s initial pricing. And since May 10, when Uber went public, Lyft stock actually has outperformed its rival, falling just 11% during that period.
Still, both ride-sharing giants have been treated roughly the same during their months on the public markets. That’s particularly surprising, given that Uber’s results have not been particularly impressive. It’s missed analysts’ average revenue expectations in each of the last two quarters. And Lyft clearly has taken market share; Uber’s ride-sharing business posted revenue growth of just 21% in Q3.
Again, LYFT stock has done a little bit better than UBER stock of late. Over the last three months, for instance, UBER has dropped 10%, while LYFT actually has gained 1%. Still, the divergence of the companies’ stock performance seems relatively thin given the discrepancy of their operational performance. Lyft is coming for Uber — and it seems to be winning.
The Risks Facing LYFT Stock
Just the fact that the two stocks have roughly equal price-revenue multiples would seem to support the bull case for LYFT stock. I have argued in the past that UBER deserves a premium, given its additional businesses like UberEats. But the collapse of GrubHub (NYSE:GRUB) suggests the delivery opportunity might not be quite as valuable as once thought. And Lyft’s relative outperformance plus its lower market share (which creates more room for gains) could even suggest that its shares now deserve the premium.
The problem at the moment is that a premium for LYFT over UBER on its own doesn’t make Lyft stock worth buying. Both stocks are more expensive than their price-sales multiples suggest, given their relatively low gross profit potential.
Both stocks have bounced, but in the context of a market that’s again interested in growth stocks; names like Shopify (NYSE:SHOP) and Roku (NASDAQ:ROKU) have also rallied. If ride-sharing stocks require that kind of market to climb, they can recede if the market drops, and there may be better growth names out there to buy.
Finally, there’s still the very real question as to whether the ride-sharing model can work over the long haul — or work well enough to boost Lyft stock price above its current $13.5 billion valuation. Neither Lyft nor Uber appears to be driving enormous growth in rides per user, suggesting little shift so far in the behavior of their existing customers. Large size is not necessarily as helpful in ride sharing as it is in other tech sectors; more riders require more drivers and potentially higher prices as a result.
Lyft’s recent performance has eased those fears, given its revenue growth and margin expansion. But, again, it still has a lot of work left to do. LYFT is still likely four years (at least) from positive net earnings. It can generate revenue growth, but its ability to become profitable is unproven. Even after its recent spectacular performance, investors clearly remain worried about those long-term risks. And it’s going to take many more impressive quarters from LYFT for that to change.
As of this writing, Vince Martin has no positions in any securities mentioned.