It’s been a rough year for holders of Lyft (NASDAQ:LYFT) stock. The company’s second-quarter earnings showed signs of post-pandemic recovery, but shares sagged after a California court battle over worker classification recently intensified. Lyft stock is down 32% this year and trades at just one-third of its initial public offering price. So is now the right time to jump back in?
Value and growth investors might BOTH think so.
Today, Lyft’s enterprise value sits at just $7.2 billion. That puts the company on the same footing as middle-sized U.S. firms such as multi-level insurance company Primerica (NYSE:PRI) and discount retailer Five Below (NASDAQ:FIVE), companies with just 57% and 51% of Lyft’s revenue, respectively.
And when Lyft, an established company in a phenomenal industry, gets priced so cheaply, it’s worthwhile to take a closer look.
Q2 Numbers Show Signs of Life for LYFT Stock
Lyft went into Q2 earnings with gloomy expectations. Revenue fell 61%, in line with predictions, though losses at 86 cents per share were slightly better than the 99 cent loss analysts expected. Initially, investors worried that the coronavirus pandemic could permanently change consumer behavior. Would people return to ride hailing once quarantine restrictions were lifted?
Q2 results say “yes”. Lyft rides bounced back 78% in July compared to April. The company now operates at 46% pre-pandemic levels, despite no longer offering shared rides.
Separately, Uber (NYSE:UBER) announced that commuting and social rides in Hong Kong, New Zealand, and Sweden returned to 109% of pre-pandemic levels in July. In other words, the worst has passed for ride hailing companies.
Lyft’s Economic Moat Remains Intact
To add to the upbeat news, SecondMeasure, a data analysis group, announced Monday that Lyft’s 30% market share remained steady in June. Investors had feared that its smaller footprint meant a higher risk of losing customers and drivers to Uber.
That’s because, in good times, the ride-share business model run in a virtuous cycle. More drivers lead to better prices and shorter wait times, which draws in more customers, and so on. It’s a model that gets better the more people join. During bad times, however, the flywheel can run in reverse – declining ridership and drivers can quickly cascade into a disaster. Companies like MySpace and Blackberry saw their users evaporate as their social networks weakened.
Investors had worried about a Lyft death-spiral. With fewer customers from the coronavirus pandemic, would drivers migrate to rival Uber and never look back?
Fortunately for Lyft, that hasn’t been the case.
While rider revenue at Lyft fell 68% in the second quarter, Uber’s numbers fell even further, sinking 73% year on year. It looks like Lyft will survive to fight another day.
Lyft Recovers From California Court Ruling
There’s one more factor could send Lyft shares higher: California voters.
Both Lyft and Uber have long fought over the employment status of its drivers. California’s courts have pushed for full-time employment, while both companies have kept their independent contractor model. On Thursday, a California appeals court diffused the situation by temporarily allowing both ride hailing companies to continue counting drivers as independent contractors. California residents will vote on the matter (Proposition 22) in November, and polls suggest that voters strongly favor an exemption for Uber and Lyft.
That’s great news especially for Lyft, which generates 16% of its revenues in California.
What Is Lyft worth?
These three reasons suggest that now could be a good time to buy stock in Lyft. The company operates in a fast-growing industry: analysts expect the ride-hailing business to expand almost 20% per year through 2025, and management still expects EBITDA profitability by the end of 2021. Even within the U.S., ride-hailing companies have incredible growth potential. According to Pew Research, just 36% of Americans have ever used ride-hailing apps, and only 10% use the apps more than once a week.
And that leaves room for massive growth.
Analysts expect the company’s revenue to increase 200% by 2024. Together they have an average price target of $43, a 53% upside from current prices.
Lyft stock is probably worth far more. Its $2.6 billion cash on hand will amply cover the next several years. And priced at a reasonable 3 times 2024 sales, the company would be worth almost $80/share. Even with the pandemic still on people’s minds, Lyft’s Q2 numbers show that the ride-hailing business hasn’t quite lost its magic just yet. Don’t let this buying opportunity go to waste.
On the date of publication, Thomas Yeung did not hold a position (either directly or indirectly) in any of the securities or cryptocurrencies mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.