Should investors buy the dip of Lyft (NASDAQ:LYFT) stock? A better question is if they should catch the falling knife that is Lyft stock. The coronavirus crisis is a terrible development for the rideshare giant. First, who wants to ride in a shared vehicle in this environment? Secondly, with public venues being shut down by government officials, there’s less need for rideshare services.
But things weren’t so hot for Lyft before the outbreak. The company’s continued operating losses remained a key risk factor. Regulatory risks related to the company’s labor policies were another negative point. Add in competition from its larger peer, Uber (NYSE:UBER), and it was already tough to see how Lyft stock could rise much further.
Yet the recent selloff of the shares may offer investors a compelling entry point. With $2.85 billion in cash on hand, Lyft could have enough of a war chest to ride out the storm. And with its valuation below that of Uber, its shares could be a steal for under $20 per share.
Let’s take a closer look.
Coronavirus and Lyft Stock
Given the outbreak and governments’ reaction to it, the service economy is in trouble. People are afraid to go out. Local governments are putting public venues on lockdown. Businesses are proactively shutting their doors.
But how will this situation affect Lyft? Without places to go, who’s going to use a rideshare service? Lyft’s demand is going to take a hit. But will this short-term hiccup turn into a long-term issue for the company?
As a Seeking Alpha contributor recently discussed, coronavirus could damage the rideshare business model. What if more people in urban areas choose their own vehicles, in lieu of rideshare services? It’s possible that fears of the outbreak will make people more cautious about using Uber and Lyft over the long-term.
Granted, this isn’t a highly likely scenario. Yet coronavirus has demonstrated the fragile nature of our modern economy. New technologies may “disrupt” older ways of doing things. But black swan events like COVID-19 do a little disruption of their own. In a highly connected world, things can turn on a dime.
However, it’s important to separate irrational fear from rational caution. Yes, rideshare services are going to take a hit from the crisis. But I don’t see the whole industry deteriorating overnight.
On the other hand, this recent headwind compounds the sector’s past downside risks. Namely, the industry’s profitability challenge, as well as the risks that regulators will look to alter its labor practices.
The Current Crisis Compounds the Sector’s Past Headwinds
COVID-19’s impact on rideshare demand only adds to the issues plaguing the industry. First, the industry lacks a pathway to profitability. In their quest for growth, investors put profits on the back burner. The whole thesis behind Lyft stock and Uber was “playing the long game.”
By that I mean that the rideshare industry sacrifices short-term profits for long-term market dominance. By under-pricing taxis and other car services, Lyft and Uber hoped their market share would rapidly rise, driving the legacy players out of business. But while Lyft and Uber have done damage to the old-school cab business, they haven’t been able to parlay their increased market share into profits.
It seems that the higher Lyft’s revenue gets, the more money it loses. Since 2016, the company’s revenue has grown from $343.3 million to $3.6 billion. But meanwhile, its net losses have grown from $682.8 million to $2.6 billion. While its losses have come down relative to its sales, when will it become profitable?
Late last year, the company anticipated reaching profitability by 2021. Yet, with the recent troubles hitting the economy, is that timeline still intact? All bets are off.
Another key factor working against Lyft stock is labor headwinds. As I discussed back in January, the backlash against rideshare companies’ labor policies could cause the wages of their drivers to increase, either as a result of action by the government or pressure from the public. Either way, the sector’s business model faces challenges.
Some say that autonomous vehicles are the answer. Yet such a pivot would shift currently outsourced functions onto the company’s balance sheet. In other words, Lyft would be trading its “asset light” model for one with greater capital intensity.
Lyft Stock Looks “Cheap,” But Be Careful
Last summer, Lyft stock was selling at a similar valuation to that of Uber. Not anymore. Lyft’s shares sell at an enterprise value/sales (EV/Sales) ratio of around one, compared to 2.3 for Uber.
With this discount, Lyft looks cheap. But the shares could become even “cheaper.” While Lyft stock could be set for an epic rebound once coronavirus fears fade, it’s tough to see whether things will get worse before they get better.
Investors should keep Lyft stock on their radar, but they shouldn’t bet the farm at today’s prices. It remains to be seen how the outbreak will impact the company. Either its losses will accelerate or the outbreak will be merely a hiccup on the pathway to profits.
Thomas Niel, contributor to InvestorPlace, has been writing single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
