When Lyft (NASDAQ:LYFT) had its highly-publicized initial public offering back in March of last year, I told investors to avoid LYFT stock like the plague. Nearly a year later, I still see Lyft as a high-risk long-term investment.
However, the company is now one year closer to potential profitability. More importantly, the stock is about a third as expensive as a year ago.
Following the recent coronavirus sell-off, I think it may be time for risk-tolerant investors to start dipping their toes into LYFT stock.
The Risks
Make no mistake about it, Lyft is still a high-risk stock. Last quarter, the company reported a $356 million net loss. It has yet to even take a whiff of a profitable quarter. In fact, management doesn’t expect the company to be profitable until the end of 2021.
In addition to steep losses, Lyft’s all-important revenue growth slowed from 63% in the third quarter to just 52% in the fourth quarter. There’s no question 52% revenue growth is still extremely impressive. But growth investors don’t like to see that growth eroding that quickly on a quarterly basis.
Another major risk that I have frequently discussed when it comes to Lyft and Uber (NYSE:UBER) is California’s AB-5 law. The law went into effect on Jan. 1 and it requires companies like Uber and Lyft to hire workers as employees rather than independent contractors. Employees have many more expensive rights and benefits to their job that could make it even more difficult for these ridesharing companies to reach profitability.
The even bigger threat for Uber and Lyft is that other states around the country will follow California’s lead and pass similar laws of their own.
The Bull Case
The bull case for LYFT stock is that the future of transportation in major U.S. cities will be ridehailing fleets. At this point, Uber and Lyft are the only significant players in a massive potential transportation market.
ARK Invest analyst Tasha Keeney estimates the cost per mile of autonomous taxis will ultimately be just 25 cents. That cost compares to around 70 cents per mile for personal vehicles. Uber and Lyft’s take rates are currently around 20%.
“Enjoying natural geographic monopolies, autonomous ridehailing companies could command much higher take-rates, up to 60%, as they transport passengers more conveniently and safely than human-driven taxis,” Kenney says.
She estimates the autonomous ridehailing winners could ultimately generate $12 trillion in cash flows.
Now, this is the same ARK Invest that has $7,000 price target for Tesla (NASDAQ:TSLA). I would take their projections about as seriously as I take Elon Musk’s projections. But the idea that autonomous ridehailing could completely transform the transportation industry is the general bull case for Uber and Lyft stock. It’s not about replacing taxis. It’s about replacing personal car use all together.
Value in LYFT Stock
Growth stocks with unproven business models like Lyft are very difficult to value. That’s one of the reasons I tend to stay away from them in general. However, earlier this month, Needham analyst Brad Erickson initiated bullish coverage on Lyft stock. In the initiation note, Erickson took a stab at making the case for Lyft’s value.
“We think LYFT’s (the #2 player in the North American shared-mobility market) 30% decline since reporting 4Q19 results (we attribute ~70% of the drop to Q4 results/guidance and 30% to coronavirus) has created an unreasonably wide valuation discount to competitor UBER (2.9x vs. 1.5x [enterprise value]/’21 revenue),” Erickson said on March 5.
He also said he likes Lyft’s risk-reward profile for the first time since its IPO. Me too! Especially now that the stock is down yet another 35% since he initiated coverage on March 5.
I’ll add another potential reason to buy. Say Lyft continues to struggle with its finances and its shares continue to drop. General Motors (NYSE:GM) already holds a 9% stake in Lyft. GM has also taken heat for not being aggressive enough in focusing on the future.
GM generated $6.5 billion in net income in 2019. Lyft’s market cap is now down to just $7.3 billion. At some point, if GM likes its 9% stake in Lyft, it may consider taking over the entire company.
Takeaway
Lyft stock has a lot of near-term risk. It also has a massive addressable market and tremendous growth numbers. It has at least one potential buyer to support its valuation. And it is valued at less than a third of its IPO price a year ago.
Finally, investor sentiment could not possibly be more negative at this point. Given those factors, I think Lyft is on the short list of potential speculative stocks to buy on the coronavirus dip.
Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. As of this writing, Wayne Duggan does not hold a position in any of the aforementioned securities.
