Lyft (NASDAQ:LYFT) stock now is down nearly 60% from its initial public offering price. And truthfully, it’s somewhat difficult to see why the stock has fallen so sharply.
That’s not to say that LYFT stock is a screaming buy — or that there’s no cause for concern. Neither is true.
Certainly, there are concerns here. Lyft remains unprofitable, and is guiding for a significant loss in 2020 as well. Rival Uber (NYSE:UBER) hasn’t done all that well since its own IPO, as the stock has dropped more than 30%.
Fears regarding the coronavirus from China have pressured both stocks of late, and make some sense. Consumers fearing a pandemic are unlikely to jump in a stranger’s car, and they’re far less likely to actually drive one of those cars.
However, aside from short-term worries, the concerns here were known when Lyft went public almost a year ago. Furthermore, Lyft’s performance over that stretch actually has been impressive. It’s certainly clear in retrospect that the IPO was priced too high, and it appears at the moment that broad market selling isn’t going to end any time soon. When it does, however, I’d expect LYFT to catch a bounce.
The Case for Lyft After Earnings
Lyft has reported quarterly results four times since going public — and crushed analyst estimates each time.
Indeed, in the fourth quarter, Lyft’s revenue growth rate was about five percentage points better than Wall Street expected. And that beat actually was the “worst” of the bunch.
A 52% increase in revenue in Q4 completes a year in which the top line increased some 68% year-over-year. And Lyft is driving that growth the right way as well. Both active riders and revenue per active ride increased 23% YOY in the fourth quarter.
However, it’s true that Lyft isn’t profitable — and the company doesn’t expect to be in 2020, either. Guidance for an adjusted EBITDA loss in fiscal year 2020 is expected to be $450 million to $490 million.
But, the company is making progress on that front. EBITDA margins should be close to -10% this year against -19% in 2019 and -44% the year before. Lyft previously had issued a target of EBITDA profitability by the fourth quarter of 2021, and reiterated that target on the fourth quarter conference call.
Moreover, nothing in the fourth quarter changes the story I detailed in December. At least relative to expectations, Lyft’s performance on the public markets has been sensational. It’s certainly been better than that of Uber, whose second quarter report in August actually brought the stock down.
However, UBER stock has posted smaller post-IPO losses than LYFT. So has Pinterest (NYSE:PINS), another high-flying 2019 IPO whose stock cratered after its third- quarter report in November. Slack Technologies (NYSE:WORK) is one of the few to see similar trading after its June direct listing, but it didn’t fall quite as far and has caught a bounce on hopes that the coronavirus will boost its business. That said, it does seem like LYFT should catch a bounce.
Are Coronavirus Fears Overblown?
Of course, recent fears of the spreading coronavirus are providing near-term pressure. Consumers that stay home aren’t spending money on ride-hailing. That said, though, Uber has argued that benefits to its Uber Eats food delivery service (a competitor to Grubhub (NYSE:GRUB)) will offset potential weakness in its airport business; But Lyft lacks that hedge.
So far, however, Lyft hasn’t seen much in the way of impact. The company just last week reiterated its guidance for the fiscal first quarter, which ends March 31. And while it’s too optimistic to model in zero impact from pandemic fears, the effect should be relatively muted from a long-term standpoint.
Lyft finished the fourth quarter with $2.8 billion in unrestricted cash and investments — and no debt. So, the company isn’t going bankrupt. And like most growth stocks, Lyft’s valuation is based on out-year profits, not near-term results. Even several more difficult quarters don’t materially change the outlook here.
Moreover, Wall Street seems to be making that argument. Just last week, Needham defended the stock, and JPMorgan Chase called the stock “extremely compelling”. Piper Sandler also called the last week of February the best in the company’s history, as some customers eschewed public transit for ostensibly safer ride-hailing opportunities.
Overall, the average Wall Street price target for LYFT stock still sits around $65.60 — suggesting nearly 100% upside from current levels.
The Problems With Lyft Stock
As a result, LYFT stock seems at least intriguing after the recent selloff. However, there are some concerns to keep an eye on.
First, the 60% decline from the IPO price doesn’t on its own mean LYFT stock has become too cheap. It’s evident from 2019’s IPOs that there was something close to a bubble in the private markets.
For instance, UBER might not be down by half from its IPO price — but it’s down by more than that from the $120 billion valuation bankers floated before it went public. Early weak trading in LYFT itself no doubt led Uber’s initial price to come down — and that, too, proved to be too high. $33 for LYFT right now may be too cheap, but $72 last April almost certainly was too expensive.
Second, Lyft still has a lot to prove. Neither Lyft nor Uber has established that the ride-hailing business can be consistently profitable. It’s worth noting that Lyft made a concerted effort in the fourth quarter to pull back on marketing incentives (according to its earnings call), but had to reinstate those incentives as demand dropped. Both Uber and Lyft have noted more rational competition in U.S. markets, but neither yet seems to have the pricing power investors have hoped to see.
And, finally, the bottom may not be in yet. U.S. stocks suffered a steep decline on Monday, and LYFT is not the name that is going to hold up in a risk-off environment. It has long-term valuation worries and exposure to short-term disruption. So while Wall Street may be bullish, I don’t expect investors will be.
But at some point, that will change. And for growth investors making a list of potential “buy the dip” candidates, LYFT at least deserves a mention. The company is executing well. Shares now trade for less than 3 times revenue on an enterprise value basis (ie, net of cash). Even with lower gross profit margins, that’s been a reasonable multiple in the growth category.
Put another way, there’s a price and a time at which LYFT will be a buy — even if neither has arrived just yet.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets. He has no positions in any securities mentioned.