Why Lyft Stock Could Bounce Back in 2020

Stabilizing growth trends and narrowing losses should drive LYFT stock above $50

It has been an ugly year for ride-sharing giant Lyft (NASDAQ:LYFT). The company made its highly anticipated debut on Wall Street in March at a price tag of $72 per share. The first day was great. LYFT stock rallied all the way to $90. Then, the fizzle started. It hasn’t stopped since, as investors have questioned the valuation on the ride-sharing giant amid slowing growth and widening losses.

Why Lyft Stock Could Bounce Back in 2020
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Today, LYFT stock trades hands under $50, a whopping 35% below its IPO price.

But, there’s reason to believe that LYFT stock can stage a huge rebound in 2020. That reason? Everything that went wrong in 2019, could go right in 2020.

That is, slowing revenue growth trends in 2019, could turn into stabilizing or even accelerating revenue growth trends in 2020 as new growth verticals gain traction and the ride-hailing market rationalizes. Widening losses in 2019, could turn into shrinking losses in 2020, as price hikes and improved scale drive meaningful margin improvements. And, multiple compression from a sky-high valuation in 2019, could turn into multiple expansion from a much more grounded valuation in 2020 as investor sentiment improves.

All in all, it appears that LYFT stock is well positioned for a big rebound in 2020. Will the stock soar back to its IPO price? Not quite. But, there is a good chance that shares rally 20% next year.

Lyft Is Positioned to Rebound

The big idea behind the bull thesis in LYFT stock is that the adverse trends that plagued shares in 2019, will reverse course in 2020.

First, revenue growth rates will stop slowing. Throughout 2019, revenue growth rates were slipping. The revenue growth rate coming into the year was up above 100%. It slowed to 95% in Q1, 72% in Q2, 63% in Q3 and 46% expected in Q4. In 2020, though, revenue growth rates should stabilize in the 30% to 40% range for a few reasons, including: 1) the growth rate has already decelerated meaningfully, 2) the laps are now way easier, 3) new growth verticals, like Lyft Rental, should gain traction and 4) the competitive landscape should rationalize, leading to lower promotions and higher take rates on bookings.

Second, widening losses will start to narrow. Also throughout 2019, Lyft’s net loss got bigger and bigger. Year-to-date, Lyft’s net loss measures over $2 billion. At this point last year, net loss year-to-date was under $700 million. In 2020, though, net losses should start to narrow, also for a few reasons. Those reasons include: 1) net losses are now already very wide, 2) Lyft will likely hike fare prices in 2020 to improve its margin profile and 3) stabilizing revenue growth rates will help offset a rapidly growing expense base.

Third, the multiple supporting LYFT stock will stop compressing, and start expanding. In 2019, LYFT stock debuted on Wall Street with a huge valuation of nearly 10-times trailing sales. In 2020, though, LYFT stock will enter the year with a much smaller trailing sales multiple of just 3. Thus, whereas slowing revenue growth and widening losses sparked multiple compression in 2019 and created a double headwind for LYFT stock, stabilizing revenue growth and narrowing losses in 2020 will spark multiple expansion and create a double tailwind.

Lyft Stock Will Take Out $50

All things considered, the long term fundamentals here support the notion that LYFT stock will retake the $50 level in 2020.

You can read my in-depth fundamental analysis on Lyft’s long-term growth potential here. But, to succinctly recap, the North American ride-sharing market is still significantly under-penetrated (only 20% of North Americans use ride-sharing apps). It’s also supported by big growth drivers such as the rise of the sharing economy, high usage rates among younger consumers, and a rapid rise in traffic problems. As such, this market will continue to add tons of riders over the next few years, and those riders will use ride-sharing apps in greater frequency.

Lyft is one of two major players in this market, where incumbency is protected by liquidity network effects. Of those two players, Lyft is the market share gainer, with all the momentum. Assuming this momentum persists, then Lyft should be able to grow even more quickly than the rapidly growing North American ride sharing market.

All this growth will inevitably result in Lyft striking a profit, since the company is gross profit positive and operates at sizable 50% contribution margins (revenue less cost of revenue). Thus, once Lyft attains scale, all of those contribution profits per ride will sum up to be more than the operating expense base.

Ultimately, my modeling suggests that Lyft has an opportunity to hit $6 in earnings per share by fiscal 2030. Based on an exit multiple of 20-times forward earnings (about average for a tech stock) and a 10% annual discount rate, that equates to a 2020 price target for LYFT stock of over $50.

Bottom Line on LYFT Stock

Lyft stock has struggled big time in 2019 thanks to slowing revenue growth, widening losses and a valuation that didn’t price in either of those negative trends. But, in 2020, Lyft stock could win big. Revenue growth rates should stabilize, net losses should narrow, and the valuation doesn’t seem to price in either of those positive trends.

Thus, LYFT stock appears well positioned to rebound in 2020.

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

Article printed from InvestorPlace Media, https://investorplace.com/2019/12/why-lyft-stock-could-bounce-back-in-2020/.

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