Lyft [LYFT] had a September to forget. The ride-hailing company saw its share price slump 17% throughout the month amid rising concerns over its valuation and profitability. The uncertainty was driven in part by the chaos surrounding WeWork’s failed IPO, which added to the narrative that unicorn stocks may not be as magical as they appear.
Lyft reported a loss of $644mn in the second quarter, overshadowing a 41% increase in user numbers to 21.8 million and a 22% increase in revenue per rider to $39.77.
Meanwhile, California passed a new law forcing Lyft and rival Uber [UBER] to classify contractors as employees, which has also given investors jitters. The change means the companies will now have to pay minimum wage, provide paid holidays and make amendments to insurance liabilities, all of which could potentially mean a rise in customer prices and another hit to margins. It could also herald further regulations elsewhere in the US, further squeezing the gig economy.
A chance to overtake?
It’s hard to gauge Lyft’s future prospects without looking at Uber. The company posted a huge $5.2bn loss in its second-quarter with its share price slumping to around $33 as of 23 October, from around $41 when it listed in May. Uber has also suffered from investor concerns around profitability and corporate governance.
|Operating Margin (TTM)||-81.64%||-66.80%|
|Quarterly Revenue Growth (YoY)||71.80%||14.40%|
Lyft & Uber share price vitals, Yahoo Finance, 29 October 2019
While some analysts believe Lyft is in a good position to take a sizeable market share from Uber as it eyes overseas growth and develops Uber Eats, others, such as Wells Fargo analyst Brian Fitzgerald, remain somewhat cautious.
“Market share runners-up in platform businesses have not, historically, benefitted from network effects to the same degree the market leader, ultimately resulting in lower growth and profitability,” Fitzgerald noted, according to Business Insider.
“Investors bullish on app-based ride-hailing business must decide whether Lyft, a US pure-play, can overcome its second-mover status and capture its fair share of future ecosystem profits.”
However, even if it doesn’t catch up with Uber some suggest there is plenty of the ride-hailing pie to go around – Wedbush analyst Dan Ives estimated the ride-sharing market is worth $1.2trn, Business Insider notes.
“Investors bullish on app-based ride-hailing business must decide whether Lyft, a US pure-play, can overcome its second-mover status and capture its fair share of future ecosystem profits” - Wells Fargo analyst Brian Fitzgerald
A roadmap to profitability
Regulatory and reputational risks abound but Lyft is still growing revenues, active users and developing new services. Lyft is set to release third-quarter figures on 30 October and forecasts revenues to grow by 54%-56% to $900m-$915m.
The expectation is also for full-year revenues around $3.5bn, however, Lyft has also forecasted a loss for the year of between $850 and $875m.
Lyft's forecasted loss for 2019
Last Tuesday, a bullish statement from the business signalled an acceleration in its profit goals.
Cofounders Logan Green and John Zimmer declared that Lyft would be profitable by the fourth quarter of 2021, a whole 12 months earlier than analysts had expected. This news was met with climbing shares, which increased from $40.40 to $44.8 – its biggest intraday rise since its float.
"We've never laid out our path to profitability, and we know that's a question on a lot of investors' minds," Green said. He pointed towards product innovations and highlighted an easing in the pricing pressure from competition – meaning Lyft has to hold fewer customer promotions – as some of reasons behind this new outlook.
Doug Anmuth, analyst at JP Morgan [JPM], played down some of the regulatory hurdles that are awaiting the company in a note in August, describing the regulatory environment as “manageable”. Meanwhile, Deutsche Bank [DB] analyst Lloyd Walmsley sees a buying opportunity. “We think the recent sell-off in Lyft’s shares presents an attractive entry point, particularly for longer-term investors,” he said in a note to clients.
According to MarketScreener, Lyft has an average price target of $69 and a mean consensus of outperform amongst analysts, while some analysts, in particular, are urging investors to look at the long-term when considering Lyft. “If you look at the likes of Amazon or Netflix, if you had waited for profitability, you would have left a lot of money on the table,” Benjamin Black analyst at Evercore ISI told Bloomberg.
“If you look at the likes of Amazon or Netflix, if you had waited for profitability, you would have left a lot of money on the table” - Evercore ISI analyst Benjamin Black
Lyft may yet have a few miles left to cover.