Logan Green, CEO of on-demand ridesharing company Lyft (NASDAQ:LYFT), has repeatedly commented on the company’s “natural operating leverage.” In fact, he’s said something along those lines in just about every earnings call. Natural operating leverage sounds great. It even helps paint a positive picture for LYFT stock at first glance. But when you look at the numbers (which tell the true story), you’ll see that Lyft’s natural operating leverage is more of a myth than a reality.
Let’s dive a bit deeper into the facts.
In the charts below, we see that from 2016 to 2019, as LYFT’s revenue rose, so did all of the operating cost segments (leading to declines in operating income). In 2020, the company cut 17% of its workforce, reduced employee compensation, paused new driver hires and eliminated rider incentives.
In my opinion, these very temporary cost cutting strategies led to a one time improvement in operating income.
Companies with a high degree of operating leverage will make more money from each additional sale without having to increase costs to produce those extra sales. Call me crazy, but LYFT doesn’t look like a company with, “natural operating leverage.” Please note that I did not remove stock-based compensation from operating expenses. You can read why on pg. 16 of Warren Buffet’s 2015 Shareholder Letter.
Lyft’s Price Surge and Analyst Estimates
The market appears to be buying into management’s positive rhetoric and optimism as LYFT stock has gained 200% over the last 5 months. The argument for vaccine distributions, city re-openings and warmer weather leading to higher future revenue may have a lot to do with the large price advance as well.
If the latter is the case, then I would expect future revenue estimates to be a bit more exciting for a stock trading at its historically highest price-to-sales multiple. According to Yahoo Finance, 2021 full year (FY) revenue is estimated to come in at $3.07 billion and $4.33 billion for fiscal year 2022.
Considering 2019 FY revenue was $3.62 billion, 2021 revenue would be a 15% decline vs 2019. And 2022 revenue would only be 20% growth vs 2019. That doesn’t look like a swift recovery to me.
However, analysts seem to have faith in Lyft’s incredible, “operating leverage,” management’s prolific cost restructuring plan and Lyft’s path towards profitability (firing 17% of workforce and eliminating rider incentives). As you can see in the table below, analysts see -1.15 adjusted earnings per share in 2021 and a positive 25 cents adjusted EPS in 2022.
I find it hard to believe that a company with annual adjusted EPS that’s more than a loss of $2 per share 5 years in a row, is going to dramatically turn it around and become profitable in 2 years’ time. Not to mention we are coming out of a pandemic where many people are afraid to get within 6ft of each other.
Lyft vs Uber
Reverting back to Logan Green and his polite euphemisms, I’d like to bring up a specific quote from the Company’s Q1 2020 earnings call: “Since the beginning of Lyft, we’ve been committed to being the lowest-cost operator in our industry. It is embedded in our culture.”
Oh really? It’s embedded in your culture?
Only once over the last 4 years has Lyft reported lower operating expenses expressed as a % of total revenue than Uber (NYSE:UBER). It doesn’t seem like they’re all that committed to being the lowest cost operator in the industry.
The Tailwinds
To be fair, the U.S. ride-hailing industry is huge and controlled majorly by two players, Uber and Lyft. The Pew Research Center reported that 36% of U.S. citizens used a ride-hailing service in 2018 vs only 15% in 2015. Even more appealing, 51% of Americans between the age of 18 and 29 used a Lyft or Uber in 2018.
On top of that, vaccines are being rolled out, states are re-opening, personal car usage is down in major cities (taken from Lyft earnings call so be careful) and somehow analysts see Lyft turning a profit on an adjusted basis in 2022.
LYFT Stock: The Micro and Macro Risks Are Too High
The size and potential of the ride-hailing market is pretty obvious, but there are just too many risks to investing in Lyft right now. In Q3 and Q4 of 2019, shared rides (sharing a Lyft with a stranger) represented 17% and 18% of the total rides taken. It’s worth wondering when/if riders will feel comfortable sharing a ride with a stranger in the future.
Other questions to ponder: What happens if a new Covid strain spreads across America? What happens if flying is permanently down? Will rides to and from airports return to even a fraction of pre-Covid levels?
Lastly, the biggest issue I have with an investment in LYFT is management’s overconfidence (or even fantasy) in getting down their operating costs and thus turning a profit in the future. Legendary investor Peter Lynch says it best when describing the effect earnings have on future stock prices: “Stock prices often move in opposite directions from fundamentals but long term, the direction and sustainability of profits will prevail.”
As of this writing, Thomas Logue did not have (either directly or indirectly) any positions in the securities mentioned in this article.
