Almost all discussions about Lyft (NASDAQ:LYFT) involve the comparison to Uber (NYSE:UBER). This has been a mistake for a while because they are not even in the same business. Yes, they do share revenue streams, but Uber is a completely different company aiming to be global for starters. LYFT stock, on the other hand, is a pure bet on human transportation in the U.S.
The fact that Lyft’s management concentrates on a specific geographic area and one business vertical means that they can really hone their skills at it. This gives them a leg up on the competition who could easily lose focus long enough to err. Also, investors on Wall Street have a better grasp on the fundamental aspects of the company so it is an easier assessment.
Currently Lyft stock is stuck in a consolidation zone. Just like the rest of the world, its stock suffered from the Covid-19 correction. It was able to mount a ferocious 160% rally from the mid-March bottom but continues to struggle with the mid point.
For the last eight weeks, the bulls have been teetering above and below the 50% Fibonacci level of the correction. The bulls and the bears are fighting for control over the next directional move.
The Bulls are in Charge of LYFT Stock
The good news is that the longer they linger around a price level the stickier it gets. Meaning the bears will have a harder time collapsing the stock without good reason.
Over time, the natural progression of stock prices is up, so this makes LYFT stock a buy on this crisis dip. This is especially true if the investor time frame is long term. It is futile to try and fish for a perfect bottom.
Fundamentally, the risk of owning the shares here is minimal. This is a growth stock so while it still loses money, its stock price is only 1.9 times its full year sales. This means that the bulls have built only a modest amount of hopium into the LYFT stock price. In case of more trouble on Wall Street, there will be a limited amount of fat to trim off it.
Nevertheless, equity markets have been resilient and perhaps too much so. Stock prices are still setting records in spite of the fact that we have not yet solved the Covid-19 riddle. We still have at least over 10 million unemployed people in the U.S. and no vaccine for the virus.
The fear index the VIX is still twice as big as its long-term average. All this is to say that there is reason to worry yet the price action is oblivious to it. That makes this situation ripe for a blindsides, so caution is warranted regardless of how great the LYFT stock opportunity is here.
The Mother of all Buy-the-Dip Opportunities
The conclusion is that investors can own shares for the long term, especially if they take partial orders so they can leave room for risk management. Or the better way to get long and leave a big buffer is to use options. There, I can sell the January 2021 $20 put and collect $1.50 for it.
The intention is to get assigned the shares if price falls to it this year. The break-even point for that scenario is $18.50 per share. This would be a great entry point into the shares since it would be close to the Covid-19 low.
The test during the quarantine was the harshest of all time, so for it to fail is an unlikely scenario. Besides it would be the mother of all dips to buy. If buying LYFT shares now makes sense, then buying them 35% lower would be a gift.
It is also important to note that this trade does not need a rally to win. If Lyft stays above $20 this year, the trade would generate the equivalent of 5% yield with zero out-of-pocket expense.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
