To no one’s surprise, the novel coronavirus has imposed a detrimental impact on the ride-sharing industry. With zero incentive to venture out – along with state governments requesting that people stay in – the depths of the pandemic caused immediate pain to companies like Lyft (NASDAQ:LYFT) and Uber (NYSE:UBER). However, both Uber shares and Lyft stock have enjoyed a solid run up from their March lows.
Now the question is, how long can this momentum last? Although substantive economic details leave much to be desired, theoretically, the current period offers significant opportunities for ride-sharing drivers. Due to lingering fears of the coronavirus, many drivers have chosen to stay at home. But for those that are willing to brave the pandemic, passenger volume should increase, given that retail sales spiked higher in May.
Indeed, the improving confidence of consumers is a net benefit for Lyft stock. Essentially, recent retail sales data confirms that people are willing to go outside for discretionary purchases and activities. Also, booming restaurant and bar revenues implies a greater need for ride sharing (think designated drivers).
However, before you call up Lyft stock, you should consider all angles. Here are two pros and two cons of the ride-sharing firm.
Pro: Travel Stats Should Boost Lyft Stock
When the crisis first struck the U.S., it wasn’t just ride sharing that suffered. The entire travel industry collapsed due to consumer fears and shelter-in-place orders. And with many regions in this country and abroad cutting themselves off from tourists, travel became almost completely irrelevant.
But gradually, travelers are coming back. Most notably, we saw big crowds during Memorial Day weekend. However, the momentum has carried forward. According to screening data from the Transportation Security Administration, passenger volume for the first half of June exceeded 6.2 million.
Granted, we’re only talking about an average of roughly 16% that of the year-ago level. But keep in mind that throughout April and most of May, daily passenger volume was down in the single digits. Plus, there’s an argument that at this point, we should be looking at trajectories rather than hard numbers.
If so, the trajectory is very positive for Lyft stock.
Pro: Limitation Is a Good Thing
In the pre-pandemic bull market, many investors eschewed Lyft stock for Uber. One of the reasons was that Uber was aggressively expanding both domestically and internationally. By securing the brand across the world, Uber could theoretically reap huge profits following their growth strategy.
Of course, this is a path that many other companies, particularly technology firms like Uber, deploy. For the most part, it seemed very reasonable. But in this pandemic, cash and stability is king. Comparatively, then, Lyft stock is on higher ground.
As you can see from their website, Lyft is limited to the North American market. Primarily, this exposure consists of major American cities and a few Canadian ones. In the old normal, this may have been ultra-conservative. But in the new normal, it’s exactly what you want to see.
We already have enough problems as it is with the coronavirus. But it appears that internationally, a second wave is on the cards. For example, Beijing is on high alert as infections have started to flare. If major international markets collapse again, that could spell trouble for Uber.
However, Lyft can avoid some of these potential troubles while it works out the present crisis one step at a time.
Con: Demand Is Terrible
Naturally, ride sharing is a high-volume business. For drivers to make a decent living, they’ve got to have several passengers a day. On the corporate end, Lyft’s brand is all about providing reasonable fares for people to go from point A to point B.
If they wanted to be in the higher-margin executive transportation business, they should have marketed themselves differently.
Logically, this dynamic sets up a big challenge during this pandemic. Frankly, I’m not sure how long individual players in the broader travel industry can last at 20% capacity or less. If we don’t move up to substantive levels – I’m thinking at least 70% capacity – Lyft stock will likely hurt badly.
Also, the other challenge is the culture within the new normal. Although marquee attractions like Disney’s (NYSE:DIS) theme parks and resorts are reopening, they are doing so under mitigated conditions, such as limited capacity attendance and perhaps requiring the wearing of masks.
That puts a damper on travel incentive – who wants to pay steep costs for a less-than-stellar experience? Therefore, you want to be careful before betting too deeply on Lyft stock.
Con: Health Risks Pose Challenges
Although the acceleration of daily coronavirus cases has thankfully faded from its peak, new infections remain at a high threshold. I think it’s too early to declare that a second wave is inevitable. However, perception can still be a headwind for Lyft stock.
As you might guess, many ride-sharing drivers don’t enjoy the best financial circumstances. Basically, if they get sick, they can lose their income until they get better. Judging from the firsthand testimonies of survivors, getting Covid-19 is no joke.
Finally, drivers (and passengers for that matter) are always taking a chance with the unknown. I’d say 99% of rides go through without a hitch. But that 1% of less-than-desirable cases always lingers in the back of the mind. And with a pandemic still alive and well, this may cause demand to stay deflated for longer than expected.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
