Lyft (NASDAQ:LYFT) stock has rewarded investors handsomely in recent weeks. Since the end of October, shares in the ride-hailing company have risen 74% as a slew of good news has cheered on investors.
“Don’t let this buying opportunity go to waste,” I wrote back in August, citing Lyft’s cheap valuation and robust business model as reasons to buy.
Even today, Lyft stock still looks undervalued. But investors should act quickly — it’s only a matter of time before the market fully digests the importance of these three reasons and sends Lyft stock even higher.
Proposition 22 Helps Lyft Stock
As Americans voted in the 2020 presidential election earlier this month, California residents found themselves also voting on a surprisingly important ballot measure: Proposition 22. The Proposition, if passed, would create a state-wide category of “gig-economy” workers. These workers would have contractors’ freedom, but still receive healthcare, minimum guaranteed payments and insurance coverage.
With the media’s attention turned to the presidential election, few outside the industry noticed: Prop. 22 passed. And it’s a huge win for Lyft and LYFT stock. Not only is California Lyft’s biggest market. The new law reduces shutdown risk and allows ride-hailing companies to push for better legislation at the national level.
For months, Lyft shares had sagged from uncertainty over worker classification. Leave drivers as contractors, and face the wrath of the media and public over its zero-worker-benefits policy. But try to give their drivers health coverage, and the Internal Revenue Service (IRS) recategorizes them as full-time employees (who then move to salary-based compensation).
Over the years, ride-hailing apps were stuck in the middle — causing courts from California to Texas to threaten service shutdowns. However, the passage of Prop. 22 finally reduces this massive risk.
A Coronavirus Vaccine
Moreover, its been back-to-back weeks of good news on the novel coronavirus vaccine front. On Monday, Moderna (NASDAQ:MRNA) announced that its candidate is 94.5% effective and that it has a longer shelf life at refrigerated temperatures.
And last Monday, Pfizer (NYSE:PFE) and BioNTech (NASDAQ:BNTX) announced initial findings that their Covid-19 vaccine candidate was 90% effective. Cyclical stocks jumped on the news; JETS, a U.S. Aviation ETF, shot up over 20% at one point in the day.
Overall, the vaccine results are particularly good news for Lyft. For months, researchers had hoped for 60-70% effectiveness; given the severity of the Covid-19 pandemic, the Food and Drug Administration (FDA) openly claimed it would consider vaccines with even 50% efficacy. But, such ineffective vaccines would have hampered recovery in ride-sharing.
That said, both Pfizer and Moderna’s vaccine candidates blew that calculus out of the water. With their high effectiveness rates, the vaccine not only pulls the immunization timeline far sooner. It also lays the groundwork for producing future pandemic-beating vaccines. In turn, Lyft should expect riders to return far faster than previously anticipated.
Better-than-Expected Q3 Earnings
Moreover, last Tuesday, Lyft announced good third-quarter results. Revenue came in at almost $500 million, compared to $496 million expected, while revenue per active rider came in at $39.94.
In typical Wall Street fashion, the announcement pushed the company shares up 5%. And far more upside is in store. That’s because Lyft operates on a network effect: more riders on the app incentivizes more drivers to join, which creates a positive feedback loop.
When the coronavirus pandemic hit, investors feared that the feedback loop could run in reverse. Declining ridership could permanently shrink the number of drivers, leading to a collapse of the network. It’s how companies like MySpace and Blackberry folded so quickly and why Lyft stock traded at such a discount.
Fortunately, Lyft’s Q3 results show the company has weathered that storm. Active riders increased 44% in Q3 to end at 12.5 million. And while that’s still lower than Q1 numbers, it signals one thing: riders are back.
Why This Matters
Since its founding in 2012, Lyft has achieved the holy grail that high-growth tech investors like me look for: strong network effects that get even better with more users. And while it’s been less aggressive in expanding at all costs, the company has still carved out a strong niche. According to Second Measure, a financial tracking company, Lyft retains 31% of the U.S. ride-hailing market.
Yet, both growth and value investors seem to have forgotten the company. Shares trade at barely half of their IPO price. And at a $12 billion market capitalization, investors should scratch their heads and ask why a fast-growing duopolistic company with 30% more revenue than slow-growth Norton LifeLock (NASDAQ:NLOK) should trade at roughly the same market cap.
The logic might have made sense; the coronavirus pandemic could have potentially destroyed Lyft’s driver network. But with the three catalysts in play, that’s no longer a concern.
What’s Lyft Stock Worth?
Collectively, analysts expect Lyft to reach positive EBITDA by 2022. And if Lyft grows in line with market trends, revenues could balloon almost fourfold to $13 billion by 2029. According to a two-stage DCF model, that would make Lyft stock worth around $115, a 200% upside to current prices.
Additionally, Lyft also presents a tempting takeover target for international ride-hailing firms. As Israeli ride-hailing firm Gett found, it’s devilishly hard for new entrants to break into an established market. As international ride-hailing and food delivery behemoths like Just Eat Takeaway (OTCMKTS:TKAYY) rebuild their cash hoard, investors should expect suitors to line up to buy Lyft.
This fall provided multiple golden opportunities to buy Lyft shares at an extreme discount. That said, don’t let today’s chance to double down go to waste.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.