In March 2019, Lyft (NASDAQ:LYFT) touched a high of $88.60. The share price subsequently slumped by 58% to lows of $37 by October 2019. Lyft stock has been gradually trending higher in the last three months and currently trades at $48.40. I believe that the stock will continue to move higher in 2020 on the back of margin expansion and market share growth.
When it comes to ride hailing services, Uber (NYSE:UBER) is usually the first name to come to mind. However, in the last three years, Lyft has made significant inroads in U.S. markets. As of November 2019, Uber had a 69.7% market share, while Lyft’s market share was 29.2%. Critically, Lyft has been gaining market share since 2016.
From a growth perspective, Lyft is focused on the U.S. and Canada. It is worth noting that between 2018 and 2025, ride sharing market in the U.S. is expected to grow at a compound annual growth rate of 15.9%. For the same period, Canada’s market growth is expected at 29.4%.
It is clear from the above data that there is ample room for growth and penetration in the coming years. I believe that the U.S. markets can be considered a duopoly and both Lyft and Uber stand to gain.
Margins Will Improve in the Coming Quarters
One of the strategies employed by both Uber and Lyft has been to offer discounts and coupons to make rides more affordable. However, investors are closely looking at profitability visibility and cash burn. From this perspective, there needs to be a clear plan for improving margins.
Lyft has already mentioned that raising prices will translate into profitability. The company plans to increase prices selectively based on price elasticity of demand. The company also plans to focus on lucrative trips such as airport rides and premium rides.
I believe that increases in pricing will not impact market share. Uber has also increased prices for shared rides in Chicago. According to analysts at Canaccord, Uber is showing “a shift from focus on growth at any cost to ‘profitable growth.’”
And without higher prices, it seems unlikely that these companies can effectively plug cash burn.
If we look at Lyft’s third-quarter 2019 results, revenue per active rider has increased by 27% in Q3 2019 as compared to Q3 2018. Further, the adjusted EBITDA margin has also improved by 3200 basis points.
Another factor that is likely to help in cost reduction is lower insurance cost. Analyst estimate that nearly 50% of the company’s costs are related to insurance expenses. Management believes that insurance cost can decline in the coming quarters.
Overall, with the current strategy to raise prices and reduce promotional incentives, Lyft will continue to report margin improvement. This is likely to take Lyft stock higher as the company targets positive adjusted EBITDA by Q4 2021.
Focused Growth With Strong Financial Flexibility
One of the major reasons to like Lyft is the company’s focused growth strategy. Lyft has presence in U.S. and Canada and the company is working on going deeper in these markets rather than expanding to new ones.
Focused growth strategy can help sustain increases in market share. Further, unlike Uber, the company does not have to deal with multiple different regulatory hurdles globally. Another major advantage of a focused growth strategy is decline in marketing cost. As Lyft increases visibility within these two countries, marketing costs will continue to decline. Sales & Marketing expense as a percent of revenue was 16% in Q3 2019, down dramatically from 41% in Q3 2018.
Investors might argue that limiting presence to U.S. and Canada can impact growth visibility. However, I earlier pointed out that these two countries will continue to witness ride sharing industry growth in the coming years. Therefore, there is no reason to believe that healthy growth can’t sustain for Lyft.
I want to add here that as of September 2019, Lyft reported cash and equivalents of $3.1 billion. This gives the company ample financial muscles to accelerate growth and invest in promotions. I don’t see further need for equity dilution.
The Bottom Line on Lyft Stock
Lyft stock has been in a gradual recovery mode in the last few months. There are fundamental reasons that support the stock upside with improving margins and a healthy growth outlook.
I believe that as Lyft gradually moves towards profitability, the stock will continue to trend higher. I am not expecting any sharp up move, but I believe that the company’s lows of $37 will not be breached.
Therefore, it’s a good time to consider fresh exposure to Lyft stock. The company’s Q4 2019 results can provide more reasons for the stock to maintain a positive momentum.
As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
