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Improved Profitability will Drive Lyft Stock Higher in 2020

In 2019, the story at ride-sharing giant Lyft (NASDAQ:LYFT) was all about huge growth at all costs, mostly because that’s what management thought Wall Street wanted to see. But, Wall Street actually ended up hating that strategy, because alongside big revenue growth rates, losses widened and long-term profitability prospects grew more bleak.

Buying Lyft Stock at These Levels Makes Perfect Sense

Source: Jonathan Weiss / Shutterstock.com

So, as Lyft drove forward on its huge growth at all costs strategy, Lyft stock dropped, by a lot. The initial public offering (IPO) price was $72 in April; by October, Lyft stock had dropped below $40.

Fortunately for bulls, Lyft is changing its strategy in 2020, and this new strategy should drive a meaningful rebound in shares.

Specifically, Lyft — alongside Uber (NYSE:UBER), which similarly employed a huge growth-at-all-costs strategy in 2019 that Wall Street hated — is putting profitability first in 2020. They are slimming down, cutting costs, reducing overhead, raising prices, etc.

The hope is that the sum of these reductions will gut the expense base without draining revenue momentum and therefore propel the company far closer to profitability. And as it does, Lyft stock will rebound.

All About Cost Cutting

Across the ride-hailing industry, 2020 is all about market rationalization and cost-cutting.

For the past few years, both Lyft and Uber have been entangled in a tit-for-tat battle in the North American ride-sharing market; nobody really won. Instead, both companies spent an arm and a leg to outgrow one another, and cut ride-sharing fees to out-price one another. It was a lose-lose situation. Sure, both companies acquired a ton of customers and sustained big revenue growth. But both companies also endured huge losses.

It took two bad IPOs to change that dynamic. Lyft and Uber’s horrible IPOs in 2019 told management at both companies that they were doing something wrong. Growing at all costs was the wrong strategy here. Or at least, it’s not the right one anymore, now that both companies are public. So they are changing strategies, and for the better.

Specifically, both Lyft and Uber are putting profitability first in 2020. No longer is it about growth at all costs. It’s about growing while cutting costs. That’s why both companies have announced significant layoffs to the tune of about 2% of each company’s workforce. It’s also why both companies are finally starting to raise — not cut — ride-sharing fees.

Both companies will continue to cut costs and raise fees throughout 2020 as they make a big push towards profitability. This will ultimately result in margin improvements, narrower losses and enhanced visibility with respect to long-term profit growth prospects. All of those good outcomes will help propel a 2020 rebound in Lyft stock.

Revenue Momentum will Remain

It is important to note that, even though Lyft is focused on cost-cutting in 2020, the company won’t lose much (if any) ride-sharing momentum.

This is for two reasons. First, the North American ride-sharing market in which Lyft operates is a two-horse race, and the other horse (Uber) is also cutting costs. So, while it might ostensibly seem like Lyft making significant cuts to its marketing team and raising fees will eat into growth, it actually won’t. That’s because Lyft’s only true competitor, Uber, is also making significant cuts to its marketing team and also raising fees. Net net, the whole ride-sharing market is rationalizing, meaning that Lyft won’t be at a disadvantage due to cost cuts.

Sure, a new ride-sharing company could emerge and try to undercut Uber and Lyft. But, the inherent liquidity network effects that come with scale in the ride-sharing market (i.e. more drivers lead to lower wait-times, which lead to more riders, which lead to higher earnings, which lead to more drivers) ensure that a small ride-sharing platform with significantly less drivers than Uber and Lyft will have a tough time competing with them at scale.

Second, secular ride-sharing adoption tailwinds remain robust. In the absence of price-cutting and big marketing spend, what will drive Lyft’s revenues higher in 2020 and beyond are ride-sharing adoption tailwinds, which remain healthy. Traffic is still a problem, especially in urban areas. Parking is still a problem, especially in urban areas. Car rentals are still expensive. Consumers still like to go out and drink at nights.

So long as those things remain true, there will remain growing demand for ride-sharing services in North America. And, so long as that remains true, Lyft’s revenues will keep moving higher.

Bottom Line on Lyft Stock

Lyft stock had a rough 2019 because the company focused on growth at the risk of profitability. In 2020, management is changing the strategy. They are now putting profitability first. This change of tune will improve the company’s margin profile dramatically over the next few quarters. As that happens, Lyft stock will rebound.

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/2020/02/improved-profitability-will-drive-lyft-stock-higher-in-2020/.

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