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Regulatory Headwinds Could Disrupt Lyft Stock in 2020

After a big drop from its post-IPO highs, Lyft (NASDAQ:LYFT) has held steady since November. The ride sharing company has managed to tread water around $45/share, give or take a few bucks. Despite California recently passed AB5 regulations, investors seem okay with the company’s valuation. But what’s in store for the LYFT stock price in 2020?

Regulatory Headwinds Could Disrupt Lyft Stock in 2020
Source: Roman Tiraspolsky / Shutterstock.com

As InvestorPlace’s Luke Lango wrote Dec. 20, ride-sharing apps have yet to reach peak usage. Only 20% of North America uses ride-sharing. Increased customer adoption, along with increased fares, are on the horizon. In other words, things could just be getting started.

But with risks related to ride-share labor regulations, it’s tough to see short-term upside for the LYFT stock price. Conversely, I don’t see shares taking a big tumble anytime soon. In this runaway bull market, a crumb of good news could send shares higher.

With this in mind, let’s take a closer look at LYFT, and see why today may not be the time to buy.

The Trends and Lyft stock

With the company’s losses widening as its revenue grows, it’s hard to see if or when Lyft will scale to profitability. Competitor Uber (NYSE:UBER) generates 4 times the revenue of Lyft. Yet, Uber also continues to lose money.

On the other hand, both ride-sharing apps are playing the long game. Firstly, they are willing to lose money as they muscle the traditional cab business. Secondly, ride-sharing offers a compelling transportation alternative. Americans under 30 are less interested in car ownership. As Millennials enter middle age, and Generation Z comes of age, expect more American households to use ride-sharing instead of driving their own vehicle.

Analyst consensus calls for revenue to grow from $3.6 billion in 2019 to $4.6 billion in 2020. While this is slower growth than in prior years, growth around 30%/year isn’t anything to sneeze at. Losses are also expected to narrow in the coming year.

CEO Logan Green says LYFT will reach positive EBITDA by late 2021. Reaching this goal would move the needle. Investors need confidence that ride-sharing is a sustainable business. With ride-share apps growing thanks to under-pricing their services, bringing up fares is key.

But operating costs could be an issue going forward. California’s AB5 bill may force ride-sharing apps to increase driver wages. Other states could also use pressure to raise driver wages. This could be harder to keep ride-sharing costs low enough to reach profitability.

How AB5 and the LYFT Stock Price

Recently, the “gig economy” has become a bigger piece of the labor pie. The “gig economy” offers greater flexibility and autonomy than traditional employment. On the other hand, it does not offer the same level of worker protections. Classified as independent contractors, Uber and Lyft drivers are more like small business owners. But unlike other types of freelancing, the ceiling is low in terms of compensation.

With low barriers to entry, more drivers mean it’s become harder to make a worthwhile wage from either app. California’s AB5 bill attempts to remedy these issues. But in practice, AB5 has been a disaster. Other types of freelancers have lost opportunities thanks to the bill.

But the ride-sharing apps are fighting things out in court. Lyft and Uber may escape AB5’s strict regulations. But to avoid AB5, they may have to increase driver compensation. Other states could threaten increased regulation to increase driver wages. Whether rideshare drivers remain classified as independent contractors is not the issue. The crux of the matter is that going forward, low labor costs may be a thing of the past.

This could be an issue for LYFT. Self-driving vehicles may be the remedy, but self-driving cars turn their asset-light “platform” business into a capital-intensive transportation business.

LYFT Stock Stuck in Neutral

It’s hard to see any needle-moving catalysts on the horizon for Lyft stock. Profitability could be just a few years away. Meanwhile, populist backlash towards the “gig economy” threatens the ride-share business model. Ride-share companies could move to automation. But this technological shift will make the business much more capital-intensive.

Valuation-wise, Lyft is no bargain relative to Uber. Lyft trades for 5.3 times trailing twelve-month sales, compared to 4.5 for Uber. Even though Uber is much larger, analyst consensus also calls for Uber to grow 30% this year.

It’s tough to see the stock price making big moves in 2020. As I’ve said before, Uber may be a better ride-share play. Otherwise, wait things out until LYFT offers a more compelling entry point.

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

Article printed from InvestorPlace Media, https://investorplace.com/2020/01/regulatory-headwinds-disrupt-lyft-stock/.

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