Optimism that Lyft (NASDAQ:LYFT) will normalize operations more quickly than expected on the back of declining Covid-19 hysteria, improving consumer sentiment and pent-up travel/mobility demand has helped Lyfy stock surge about 150% from its mid-March lows.
Many pundits are questioning the sustainability of this rally amid a surge in Covid-19 cases and hospitalizations across the U.S. The thinking is that a “second wave” of the coronavirus pandemic will scare consumers back inside, kill the economic reopening and cause LYFT stock to plunge.
But none of that is going to happen. And LYFT stock is a buy on near-term weakness.
Here’s why.
Mobility Is Going Up
Many consumers and legislators alike have decided that the economic and social costs of a continued shutdown of the American economy outweigh the human costs of the virus.
That is, thanks to the shutdown, tens of millions of Americans have lost their jobs, there has been a spike in anxiety and depression nationwide and overall quality of life and happiness among Americans has dropped to 50 year lows.
Right or wrong, many Americans believe that those costs are too high to avoid a virus, which the CDC estimates is actually less deadly than the flu for individuals under the age of 50.
As such, even as coronavirus cases and hospitalizations have risen over the past two weeks and media outlets have covered this spike in-depth, consumers are still going out. Search interest related to travel agencies has been on a steady increase since mid-April.
Search interest related to restaurants, bars and shops has also been on a steady increase since mid-April, with each three spiking to 90-day highs in mid-June. Downloads of the Lyft app have continued to rise in June, while Evercore data also showed a continued recovery in ride-sharing trends.
Long story short, a recent surge in Covid-19 cases across the country has not — for the most part — scared consumers or derailed the economic reopening, yet. Barring some drastic change, I don’t think it will do either anytime soon.
From this perspective, the mobility of the U.S. consumer is going to steadily increase over the next few quarters, even in the face of a second wave of Covid-19.
Lyft is part of the backbone of U.S. consumer mobility. Consequently, Lyft’s growth trends should only improve from here.
Lyft Stock Is Undervalued
For LYFT stock, the next stop is $45.
The consensus revenue estimates on Wall Street call for 30%+ revenue declines from Lyft in both the second and third quarters of 2020. But it increasingly appears, given rising mobility trends, that Lyft can do much better than that in both quarters. My modeling suggests something like ~20% revenue declines in Q2 and potentially flattish revenue in Q3 are entirely possible.
That represents a huge upside from consensus estimates. As such, better-than-expected numbers over the next two quarters give LYFT stock significant firepower to charge higher.
This rally will likely power LYFT stock towards $45, which is around where the company’s long-term profit growth prospects say the stock is fairly valued today, on the assumption that Covid-19 is a near-term headwind and that the secular ride-sharing growth narrative will resume in 2021, post-Covid-19 vaccine.
To that end, any and all near term weakness in LYFT around $35 on “second wave” concerns in June, looks more like a buying opportunity than anything else.
Bottom Line
A second wave of Covid-19 is coming. While this second wave will slow the U.S. economic recovery, it won’t derail it. From June to December, U.S. economic activity will improve, consumer behavior will normalize and mobility will increase.
As that happens, Lyft’s demand trends will continue to rebound. Alongside rebounding demand trends, LYFT stock will power back to where it was before the Covid-19 crisis first emerged.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was did not own a position in any of the aforementioned securities.
