Over the past several months, ride-sharing demand has dropped considerably, affecting the price of Lyft (NASDAQ:LYFT). Year to date, LYFT stock is down about 33%.
Yet that metric tells only half the story. In March, the shares hit a 52-week low of $14.56. Now, they are flirting with $30. Put another way, $1,000 invested in the stock in early spring would have almost doubled in value.
Lyft is expected to release financial results for its second fiscal quarter ended June 30 after the close of the market on August 12. Market participants are wondering whether the ridesharing company can make a new leg up soon.
However, if you are not yet a shareholder, you may want to wait before you commit capital into the business as LYFT will likely come under pressure in the coming weeks. The price may be range-bound between $22.5 and $27.5. Here is why.
Lyft Stock and Q2 Results
The ride-sharing market is expected to reach close to $220 billion worldwide by 2025. It has been growing globally thanks to the spread of app-based transportation network services (TNCs), like Lyft and its main competitor Uber Technologies (NYSE:UBER). These companies successfully use platform technology to bring together independent drivers and customers in a sector that otherwise has high barriers to entry.
According to recent research led by Sina Shokoohyar of Saint Joseph’s University, Philadelphia, the popularity of Lyft and Uber has mainly been “due to their convenience, lower cost and faster services in comparison with traditional taxi systems.”
Last year saw impressive growth numbers in both companies. But then came 2020… While the pandemic hit our shores, “stay-at-home, work-from-home” trends started affecting personal and professional lives considerably. As commuters stopped leaving their homes, ride-hailing demand dropped like a stone.
When San Francisco-based Lyft released Q1 results in May, the economic effects of the COVID-19 pandemic became quite clear. During the quarter, Lyft had slightly over 21.2 million active riders. A year ago, the quarterly number had been 20.5 million. The YoY increase of 3% is not necessarily enough for a young company like Lyft.
When Lyft’s Q2 results are released, investors will probably pay special attention to the revenue and passenger metrics as well as its forecast for the rest of the year. If the company’s outlook is dire, then investors may simply decide to take profits in Lyft stock.
Can Aggressive Cost-Cutting Help Lyft Further?
Over the past few weeks, headlines regarding a potential second wave of the pandemic have been on the rise. And many people are still staying home or working from home whenever they can.
Recent figures show how Lyft and Uber have been suffering further in the second quarter. In June, sales numbers for Lyft and Uber were down 75% and 78% YoY respectively. Lyft’s share of the U.S. ride-sharing market is about 30%, although the number varies regionally.
In Q1, Lyft management highlighted how the company has been working on its cost structure. About 35% of its costs are variable.
“We are responding to the pandemic with an aggressive cost reduction plan that will give us an even leaner expense structure and allow us to emerge stronger,” said CEO Logan Green.
In fact, during the first quarter, revenue per active rider was $45.06, or a YoY increase of 19%. However, keeping down costs would simply not be enough if revenue numbers are not there.
The recent price increases in many shares, including Lyft stock, were mainly due to the optimism that we’ll likely have a V-shaped recovery in the second half of the year. However, if the economy takes longer to function fully, then investors would likely hit the “sell” button in LYFT shares and book some of their recent paper profits.
At this point, I don’t expect the bulls to take charge in the near-term. Thus the shares will need a catalyst to make them attractive in the eyes of long-term investors. In the next few weeks, Lyft s likely to trade between $22.5 and $27.5.
The Bottom Line on Lyft Stock
Ride-sharing apps like Lyft and Uber have become a large part of the growth of the modern gig economy. Until our lives were disrupted by the novel coronavirus, both companies looked to benefit from increasing passenger numbers.
Yet, it is still not possible to tell when life will go back to normal for consumers and many companies. If we’re headed for an especially prolonged downturn of the economy, then it’d be too soon to expect a rapid rebound in demand for TNCs.
Thus Lyft stock would not recover fully anytime soon. Cutting costs to improve margins on the way to profitability only really help when sales numbers are also there.
LYFT shares are likely to continue to be volatile heading into early August, when the company is slated to report its Q2 results. Therefore, if you don’t yet own Lyft stock, you may want to wait on the sidelines prior to the release of the company’s results.
Any move toward the $25-level or below may offer a better entry point for long-term investors.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan did not hold a position in any of the aforementioned securities.