An interesting and peculiar beacon of strength amid the recent turmoil of the financial markets has been Lyft (NASDAQ:LYFT) stock. In early May, U.S. President Donald Trump fired off a tweet threatening to raise tariffs on China. The first week after that tweet was rough for stocks, and pretty much every stock dropped during that stretch. But, ever since that first week, there’s been a clear divergence between winners and losers, and the S&P 500 has essentially traded flat.
One notable winner has been Lyft stock. Since May 13, Lyft stock price has risen nearly 20%, while many of its growth-stock peers have struggled during that same time frame, with Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and Alphabet (NASDAQ:GOOG
) all dropping.
Those who are bearish on Lyft stock may counter that Lyft is just getting a dead-cat bounce before its next major selloff, and that Lyft stock price won’t continue to rise. Bulls, conversely, could argue that Lyft stock price has finally bottomed, and is now ready to regain its IPO levels.
Which argument will turn out to be true?
I think the bullish take will prevail. Lyft is well-positioned to grow rapidly over the next several years. Concerns about its profitability are overstated, as are worries about its competition. Meanwhile, its profits could eventually be quite large, and its likely future profits justify a much higher price tag than $60 for Lyft stock today.
All in all, then, it looks like Lyft stock price is poised to rise much higher soon. In other words, the rally of Lyft stock will persist for the foreseeable future.
The Resilience of Lyft Stock Makes Sense
The resilience and relative outperformance of Lyft stock amid escalating trade tensions between the U.S. and China makes sense.
Lyft has essentially zero exposure to China at this point. The company indeed has very little international exposure, as most of its revenues are derived from its U.S. ride-sharing business. Thus, the trade war is only relevant to Lyft to the extent that it affects the U.S. economy, and the outlook of the American economy remains favorable today.
Further, Lyft stock had been really beaten up heading into mid-May. Lyft stock price at one point reached as low as $47, a 35% plunge from its $72 IPO price. The stock was due for a bounce, and as the market tumbled on concerns that were largely unrelated to Lyft, the timing was right for a bounce by Lyft stock.
All in all, then, resilience of Lyft in mid-to-late May makes sense.
Lyft’s Big Opportunity
This resilience should turn into consistent outperformance by Lyft stock, mostly because Lyft is rapidly growing and has tremendous, additional expansion opportunities.
Ride sharing is the future of personal transportation. Generally, owning cars is costly and inconvenient for consumers. On the convenience side, there are simply too many cars on the road, partly because so many people own cars. That situation leads to more traffic and longer commute times. Meanwhile, the costs of owning and maintaining a car are high relative to how much most urban consumers use them. Ride sharing solves these problems by enabling consumers to share vehicles, decreasing the volume of cars on the road.
Because ride-sharing provides consumers with enhanced convenience and price advantages, it’s the future of the transportation market. Yet, according to Lyft’s IPO filing, ride sharing accounted for just 1% of total vehicle miles traveled in the United States in 2016. That’s tiny, and it means that the U.S. ride–sharing market will eventuality be much, much larger than it is today.
In that market, there are really only two players: Lyft and Uber (NYSE:UBER). Of those two, Uber is bigger. But Lyft is growing more quickly and is rapidly gaining market share.
Thus, Lyft looks poised to eventually become a very important, major player in the potentially enormous ride-sharing market. Ultimately, that position will propel the market cap of Lyft well above its current level of less than $20 billion.
Risks Are Overstated
At the current moment, there are two big risks to Lyft’s growth outlook: profitability and self-driving. Both risks are overstated.
For some reason, there’s a notion floating around that Lyft can’t be profitable. That’s just wrong. Lyft exited 2018 with 45%-plus contribution margins, and that rate is increasing as the company expands. It could easily, eventually hit 50%-plus. Consequently, the only reason Lyft isn’t profitable today is because the company is spending an arm and a leg to grow. Over time, its investments in its growth will phase out as the ride-sharing market matures. When that happens, its operating-spending rate will drop, leading to sizable profits.
The other meaningful risk facing the company is self-driving. Specifically, bears are concerned that as self-driving becomes a reality, Lyft could be left in the dust as self-driving companies like Alphabet’s Waymo launch their own ride-hailing services.
That concern is also overstated. In reality, an autonomous-vehicle (AV) ride-hailing service has two parts: the AVs and the ride hailing. Waymo provides the hardware, or the AVs, and Lyft provides the logistics and software, or the ride hailing. Thus, future AV-ride-hailing services will be enabled by partnerships between AV makers and ride-sharing companies.
That’s exactly what is already happening. Waymo and Lyft have partnered to launch an AV ride-hailing service in Phoenix. That is the first of what will be many partnerships between these two companies around the world. Thus, the risks posed to Lyft stock by self-driving are overstated, and indeed, self-driving may actually provide a tailwind to Lyft stock price over the next few years.
The Bottom Line on Lyft Stock
Lyft stock had an ugly debut on Wall Street. But, with a 20% rally over the past two weeks, it increasingly appears that the worst may be over, and that the shares are in the midst of a rally. If that is the case, this turnaround could produce huge gains for the owners of Lyft stock because Lyft is rapidly growing and has a potentially enormous market, while Lyft stock price looks cheap relative to its long term potential.
As of this writing, Luke Lango was long LYFT, FB, AMZN, GOOG, and UBER.
