All the attention focused on last Friday’s Uber (NYSE:UBER) IPO — priced at the low end of its valuation range and then promptly trading even lower on opening day — doesn’t bode well for Lyft (NASDAQ:LYFT) shares. Just look what’s happened to LYFT stock since last week’s earnings report.
Despite beating first-quarter earnings and revenue expectations last week, Lyft stock tanked another 13.4% to new lows. Shares are now trading more than 30% below the Lyft IPO price.
Why? Here are three reasons investors are bailing on Lyft in the aftermath of its IPO.
Lack Of Clarity
Story stocks like Lyft inherently require a leap of faith. Lyft reported a net loss of $911 million in 2018 and another $1.12 billion in Q1. The only reason an investor would buy a company like this is because they believe these numbers will get much better in the future.
Until things get better, it’s Lyft’s job to provide as much evidence as possible of a path to a viable business model. Q1 revenue growth was 95%, a number that looks impressive unless it’s compared to 2018 revenue growth of 100% or 2017’s 220%.
To make matters worse, Lyft said it will not be reporting take rates. This key metric — the percentage of the value of the transactions that Lyft facilitates and gets to keep as revenue — helps investors determine the efficiency of the ridesharing app’s business.
It’s understandable that analysts are frustrated with that a company reporting record losses is also expecting investors to take its word that things will get better.
“Limited detail from LYFT around core metrics like number of rides, bookings and take-rate make it more difficult to decipher trends in unit economics and competitive dynamics,” Guggenheim analyst Jake Fuller says.
You can bet your bottom dollar that if these metrics helped support Lyft’s path to viability, management would be shouting them from a mountaintop.
Rideshare Growth Concerns
Another part of the Lyft stock bull case is that margins will expand as the company scales up its business. Unfortunately, several analysts have mentioned concerns over slowing ridesharing growth following Lyft’s report.
“Lyft and Uber’s combined results suggest the overall market in North America is slowing, which creates uncertainty around longer-term growth and margin forecasts,” KeyBanc analyst Andy Hargreaves says.
Hargreaves says a deeper dig into Lyft’s longer-term guidance suggests the North American ridesharing market may be growing at only around a 20% annual pace. That rate is well below previous projections. It may also be a sign that ridesharing services are having difficulty penetrating outside of large metro markets into more rural regions.
LYFT Stock Now A Consolation Prize
Now that Uber has officially hit the market, most ridesharing investors will forever be choosing between UBER stock and LYFT stock. Clearly, Uber has the market share advantage, the brand recognition advantage and even a major advantage in next-generation autonomous vehicle (AV) technology. To Lyft’s credit, a new partnership with Alphabet (NASDAQ:GOOGL) subsidiary Waymo may help it close the AV tech gap. However, Wedbush analyst Daniel Ives says competition with Uber for customers and investors will make life miserable for Lyft.
“While the stock has been unduly crushed in the near-term and should see a relief rally on the heels of these results/guidance, this remains an Everest-like uphill battle for the stock to get re-rated given the current competitive market dynamics,” Ives says.
Lyft reported a 46% increase in active riders in the first quarter. Unfortunately, Lyft still only holds about a 30% of the total ridesharing market. At the same time, Lyft has been paying a pretty penny to gain and maintain that minority share. Massive Q1 losses were due in part to driver and passenger subsidies. These deep discounts helped the company pump up those growth numbers at the expense of its shareholders. Lyft spent $227 million on sales and marketing in the first quarter, roughly 30% of its total revenue.
In other words, Lyft is spending like crazy to gain market share. Unfortunately, it’s still playing a distant second fiddle to Uber.
Takeaway on Lyft Stock
It clearly doesn’t matter that Lyft stock beat on earnings, revenue and guidance. Any investor who cares about earnings already isn’t touching the Lyft IPO with a 10-foot pole.
Investors wanted clarity. Instead they got record losses and evidence of a maturing ridesharing market. On Friday, they also got a bigger, better alternative in Uber.
At this point, the best way for ridesharing bulls to think of Lyft stock may be as the short end of a pair trade with Uber. Lyft’s earnings report was its last major catalyst for a while. Given its steep sell-off, additional downside for Lyft stock may be limited in the near-term. However, it’s hard to see how the stock trades much higher until investors get a good reason to buy.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.