On Sep. 29, the Seattle City Council passed an ordinance that requires Lyft (NASDAQ:LYFT) to pay its drivers a minimum hourly wage of $16.39, the same rate required of companies with more than 500 people. This is not good news if you own LYFT stock.
I’m sure you’ve heard that before, but let’s dig into why.
Coming to America and Beyond
Of course, Lyft and Uber (NYSE:UBER) are deeply troubled by Seattle’s move to treat its drivers like every other employee in the city. More importantly, it acts as a severe headwind for both companies’ pathways to profitability.
Uber and Lyft suggest that drivers in Seattle are primarily working part-time and earning the city median wage. The University of California at Berkley and New York’s New School believe the actual hourly net earnings are under $10 with 33% of its drivers working more than 32 hours per week.
Who’s right? As an investor, that’s the wrong question to ask. The right question: Can it make money paying its drivers $16.39 an hour?
“The City’s plan is deeply flawed and will actually destroy jobs for thousands of people — as many as 4,000 drivers on Lyft alone — and drive rideshare companies out of Seattle,” Lyft said in a statement.
The great thing about capitalism is you have a choice. Lyft doesn’t have to operate in Seattle. If it doesn’t like the rules it has to play under, it’s free to leave.
Recently, in my town of Halifax, Nova Scotia, the municipal and provincial governments here made changes to the rules involving ride-hailing so that Lyft and Uber would be incentivized to set up shop in Atlantic Canada’s largest city.
The head of the provincial Progressive Conservative Party, the official opposition to the governing Liberal Party, believes most Nova Scotians welcome the changes.
“Services like Uber, Lyft and home grown services like Prince Edward Island start up Kari / RedRide, will provide a safe affordable way to move about, particularly in rural Nova Scotia while empowering properly vetted and licensed drivers to use their vehicle and time to make extra money,” Houston said.
My wife and I moved from Toronto almost three years ago. We’ve been patiently waiting for Lyft and Uber to come here.
So, while the minimum wage in Nova Scotia is only 12.55 Canadian dollars ($9.38), 43% less than Seattle’s wage, the population is 412,674. Seattle’s population is approximately 10 times larger.
Lyft will probably come here, but the opportunity to make a buck won’t be nearly as high as it is in Seattle and the surrounding suburbs.
The reality is that in most cities across North America, the hourly minimum wage will continue to move higher. Here in Nova Scotia, the minimum hourly wage is scheduled to increase to 13.10 CAD ($9.79) on April 1, 2021, incrementally after that based on the consumer price index (CPI). It’s not going the other way.
As an investor, you have to decide if economies of scale are enough to deliver future profits despite the reality staring you in the face.
Does This Make LYFT stock Uninvestable?
Maybe. Maybe not.
Lyft reported its second-quarter results in mid-August. On the top line, sales were $339.4 million, 61% lower than a year earlier due to the novel coronavirus. On the bottom line, Lyft lost $437.1 million during the quarter, a 32.2% improvement from its $644.2 million loss a year ago.
InvestorPlace’s Robert Lakin reported in early September that the company’s trips in August rose 7.3% over those in July. Lyft announced that its third-quarter adjusted EBITDA loss should be no higher than $265 million. In Q3 2019, its adjusted EBITDA loss was $128.1 million.
In Q3 2019 it had 22.3 million active riders, a 28% increase over a year earlier. In the second quarter of 2020, that number was 8.7 million, 60% down from Q2 2019.
So, based on the numbers above, it lost approximately $5.74 per active rider in Q3 2019. In Q2 2020, its adjusted EBITDA loss was $280.3 million or $32.22 per active rider.
Assuming the number of active riders in the third quarter is halfway between Q3 2019 (22.3 million) and Q2 2020 (8.7 million), we’re looking at 15.5 million. Based on its projected loss of $265 million, that’s a loss per active rider of $17.10.
From an investment standpoint, before Covid, Lyft was generating $42.82 in revenue per active rider and losing $5.74 from this same active rider, which means in the third quarter of 2019, it was spending $48.56 per active rider — and that was relatively speaking a healthy quarter.
Now, factor in the rising minimum wage across North America, and it seems unlikely that Lyft will reach profitability anytime soon.
In late July, I recommended that anyone interested in LYFT stock instead buy some Tesla (NASDAQ:TSLA). Lyft is down 9% in the two months since Tesla’s up 40% in the same period. In April, I said Lyft was a good bet for aggressive investors only, so I wouldn’t say it’s totally uninvestable.
That said, I continue to believe TSLA is a far better stock to own over the long haul, not the least of which is the fact the minimum wage isn’t nearly as big an overhang for Elon Musk.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
