Ever since the novel coronavirus pandemic hit, companies in the sharing economy like Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER) have been pummeled left, right, and center. Massive disruptions in traditional business lines, coupled with steep share price drops, are making analysts wonder if these companies will survive the crisis. But before we raise the white flag, we have to admire some companies that are battling hard like Lyft and Lyft stock.
This past Wednesday, the company defied expectations when it dropped a better than expected earnings report. The market rewarded the company with a 15% bump in share price in return.
Revenues were up 23% from the previous quarter, beating Wall Street’s consensus estimates by 6%. The company posted an adjusted EBITDA loss (earnings before interest, taxes, depreciation, and amortization loss) of $85.2 million, narrower than original projections of a $140 million loss.
These reductions are mainly due to the company’s aggressive cost-cutting measures in the wake of the virus. Additionally, active ridership base and revenue per active rider improved by 3% and 19%, respectively, from the previous quarter. You can see that it was not the massacre most analysts were expecting.
However, the results only incorporate a couple of weeks of the pandemic’s impact through March, which means the worst news is likely to be reflected later in the year. The company stated that the shelter-in-place orders and travel restrictions plummeted ridership by 75%.
Due to the growing uncertainty surrounding the business environment, the company suspended its guidance for the year. Let’s look at some of the key takeaways from the quarter and the developments that could impact the company’s future, which is looking increasingly uncertain.
Cost Cutting Measures
Ride-hailing companies are among the businesses’ worst hit by the novel coronavirus pandemic. Financial pressures are now taking a toll on these companies, with Uber letting go of 20% of its workforce while Lyft is furloughing 17%.
Logan Green, CEO of Lyft, stated that the pandemic had a “profound impact” on Lyft’s customer base. He added that the company is adopting an aggressive cost-reduction plan, which will streamline its expense structure.
Overall, Lyft has decreased costs by 29% as a result of cost savings through layoffs, overhead expense reductions, and reductions in research and development. The board of directors will also have to forego 30% of their cash compensation during the second quarter.
Ride coupons have also been stopped and new driver recruitment halted until rider demand rebounds again. The company states that these measures are likely to reduce annualized expenses by roughly $300 million by the fourth quarter of this year. Additionally, it has also cut down its capital expenditures by 62%.
To put things in perspective, it seems that Lyft’s cost-cutting practices will remain a major talking point in the industry until we see the back of this crisis.
Lyft’s Legal Issues
Heading into the second quarter, Lyft faces a lawsuit in the state of California, which claims that ride-hailing companies are mis-classifying their drivers as independent contractors instead of employees. The Attorney General for the State, General Xavier Becerra, stated that the practices of Uber and Lyft were “in direct contravention of California law.”
California updated its gig economy laws back in January, stating that the classification of drivers as independent contractors, rather than employees, was depriving them of their rights.
Mr. Becerra feels that the pandemic has highlighted the unfair treatment of drivers by ride-hailing companies who have failed to do their part for their workers. Uber and Lyft are trying to work their way around the legislation, but are likely to run into major complications.
Mr. Becerra is demanding $2,500 for each violation of California’s Business and Professions code, and another $2,500 for each violation of California’s Unfair Competition Law as proven at the trial. These penalties are likely to increase total costs and expenses by hundreds of millions of dollars for Uber and Lyft. It would be interesting to see how the situation pans out in the upcoming quarters and its impact on Lyft stock.
Unlike Uber, Lyft has not diversified its business model beyond its traditional business lines. However, it seems that the company is finally expanding beyond its core offering with its recent announcement of a new service called Essential Deliveries.
The new program will tap into its massive driver base to deliver essential items such as medical supplies, groceries, hygiene products, and other staples. Initially, the program will cater to specific organizations such as government agencies, non-profit organizations, and hospitals. The company is looking for diverse partnerships to expand their availability across the country. Some of its early partners include Dole Packaged Foods, which works to deliver food to senior facilities, and the Army of Angels, which provides school lunches to needy families.
Currently, the company has no plans of expanding into the food ordering and delivery business, such as its rival Uber has done with Uber Eats. In the future, though, the company might explore several consumer-oriented services; therefore, their entry into the food ordering and delivery business cannot be completely ruled out.
Burn, Baby, Burn
We’ve already gone into detail regarding how Lyft stock has not done itself any favors in having a less diversified portfolio. Apart from the long-term strategic issues that come along with this attitude, cash burn for the company has also been significant.
After the March 2019 IPO, Lyft was in a relatively healthy position liquidity-wise, but now that strength has evaporated. It still has $2.6 billion in its kitty as per the last reported figures, but don’t expect that to last long in this environment.
Don’t let the cash balance lull you into a false sense of security. It’s just a matter of months when the liquidity situation for the company turns critical, and you don’t want to be heavily invested in Lyft stock when that happens.
Final Word on Lyft Stock
Uber stock is down 20% over the past year, while Lyft is down almost 40%. Uber’s massive scale and reach give it an edge over Lyft in weathering the storm. It also has Uber Eats as its backup plan. The same cannot be said for Lyft.
What’s even more worrying is that the company expects significant changes in consumer behavior even after the restrictions are lifted. Though analysts have a “hold” or “buy” rating for Lyft stock, I would urge investors to give other companies a chance that have better balance sheets and fundamentals.
As of this writing, Muslim Farooque did not hold a position in any of the securities mentioned above.