Ride-hailing stocks had a rough 2019. Both Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) hit the public markets last year and neither lived up to the huge expectations. That’s why LYFT stock currently trades 36% below its initial public offering (IPO) price, while UBER stock trades 23% below its IPO price.
But both of these beaten-up ride-hailing stocks have recently shown signs of life. From its early October lows, LYFT stock has risen more than 25%. At the same time, UBER stock has rallied more than 35% from its early November lows.
This ride-hailing stock rebound is more than just a head-fake or a near-term phenomena. It will continue for the rest of the year, and when all is said and done, 2020 will go down as the year that ride-hailing stocks bounced back.
What will drive this rebound? Market rationalization. Long story short, the ride-hailing market is rapidly rationalizing, and continued market rationalization in 2020 will materially improve both Lyft and Uber’s profitability profiles. Namely, margins will move way higher and losses will get way smaller. As this happens, both LYFT stock and UBER stock will rebound.
The Ride-Hailing Market Will Rationalize in 2020
The big idea behind the bull thesis on both LYFT and UBER in 2020 is that the ride-hailing market in which both companies operate will dramatically rationalize over the next few quarters, leading to bigger margins and smaller losses for both companies.
Long story short, the profit issues which have hamstrung Uber and Lyft since their IPOs are self-inflicted. Both companies have been aggressively discounting rides and spending exorbitantly on research, development, marketing and international expansion to out-compete one another. These strategies worked in the private markets, where investors weren’t as concerned about profits. But they haven’t worked in the public markets, where widening losses at both companies have scared away investors.
Neither of these companies want their stock prices to keep dropping. So both Uber and Lyft are have gradually shifted their growth strategies from “grow at all costs” to “cut costs, even if it means sacrificing growth”. Thus, while revenue growth rates have decelerated at both companies recently, so has each company’s expense growth rate. Last quarter, Lyft’s expense growth rate slowed from 50%-plus the prior quarter, to under 20%, while Uber’s expense growth rate slowed from nearly 40% to under 30%.
Crucially, expense growth rates have moderated a lot, while revenue growth rates have only moderated a little. This is important, because it means that macro ride-hailing tailwinds are strong enough to support 20%-plus revenue growth rate at each company, even as expense growth rates moderate to under 20%.
This coupling of revenue growth rate stabilization and expense growth rate moderation will continue in 2020.As it does, both Lyft and Uber will report materially higher margins and narrower losses.
Lyft Will Push Back Toward Its IPO Price
Higher margins and narrower losses will push LYFT stock higher in 2020.
My long-term model on LYFT stock assumes a few simple things. One, the ride-hailing market will get quite a bit bigger over time, as ride-hailing services become the preferred mode of transportation in most urban areas around the globe. Two, Lyft will remain the strong number two player in the North American ride-hailing market. And three, Lyft’s margin profile will dramatically improve thanks to market rationalization and sustained platform usage growth.
Under those assumptions, I think Lyft can do about $6 in per-share earnings by 2030, which presently supports a $50-plus price tag for LYFT stock in 2020 (based on a 20-times forward earnings exit multiple and a 10% annual discount rate).
Above $50 is exactly where I think LYFT stock will head in 2020. As margins move higher and losses narrow, investors will grow increasingly optimistic about Lyft’s long-term profit growth prospects. Stocks are simply discounting mechanisms for long-term profit growth prospects. The better those prospects get, the higher a stock goes.
LYFT stock will act no differently in 2020. As the company’s long-term profit growth prospects improve thanks to continued market rationalization, shares will move higher.
Bottom Line on LYFT Stock
The bottom line here is simple. LYFT stock is already up more than 25% on early signs of ride-hailing market rationalization that will persist in 2020. And as it does, so will recent strength in LYFT stock.
As of this writing, Luke Lango was long UBER and LYFT.