The demise of Lyft (NASDAQ:LYFT) stock has been fairly easy to recognize. In April 2020 I wrote that the company’s valuation, which was around $8.5B at the time, wouldn’t survive the pandemic.
Since then, the stock has dropped roughly 66% while the S&P 500 is up over 45%.
More recently, in August 2022, I questioned the company’s growth outlook which seemed overly ambitious and lacked many of the strategies that worked for Uber (UBER).
Since then, the stock has dropped another 46% while the S&P 500 has fallen just 5%.
The good news is Lyft still enjoys a duopoly-like market position in the United States and there’s certainly some opportunity to expand into vertical industries like Uber has with international expansion, food delivery and freight. Unfortunately for Lyft investors, management hasn’t seemed keen on developing any of the strategies that have worked for Uber.
Before we discuss the opportunities that management has, so far, passed on – let’s examine the Q4 earnings that sent the shares reeling over 36% in one day.
Q4 Financial Overview
|Q4 2021||Q4 2022||% Increase|
|Cost of Revenue||$551.2M||$774.4M||40.5%|
|Operation and Support||$109.9M||$120.7M||9.8%|
|Sales & Marketing||$123.9M||$130.7M||5.5%|
|Total Costs & Expenses||$1.24B||$1.771B||42.8%|
|Loss From Operations||($273.6M)||($596M)|
Data Source: Lyft Q4 Slide Deck
Some encouraging signs for Lyft are the fact the company didn’t have to exponentially spend more on marketing to achieve the 27% revenue growth. However, we saw Uber actually drive down sales and marketing cost (on even higher revenue growth) in the same period – so this points to more of an industry trend rather than an achievement specific to Lyft.
The general and administrative costs ballooned over 93% Y/Y primarily due to insurance reserve increases. However, the most concerning part of Lyft’s business is the fact the company has little ability to expand gross margins.
If Lyft raises the price of ride fares, riders simply open the Uber app or take an alternative form of transportation. If Lyft cuts the percentage a driver earns, the driver opens the Uber driver app or works an alternative delivery gig.
This phenomenon doesn’t appear like it will alleviate itself, as Uber is in a particularly solid position financially and can maintain the current market dynamics longer than Lyft can.
What’s The Turnaround Plan?
With losses continuing to accelerate, Lyft would be wise to invest in some of the market opportunities that have worked for Uber. Unfortunately for investors, management at Lyft don’t appear to be heading down that path.
Over the past year, Lyft has invested into a proprietary map integration. While this might insulate the company from licensing maps from a third-party, it’s a mystery how this significantly benefits Lyft shareholders. The company claimed last year it was to lower insurance costs and integrate other features for the driver/rider. However, despite more than half the rides using Lyft Maps, the Q4 financials don’t show much evidence there’s a financial benefit.
Meanwhile, Uber has built up a delivery business that achieved $2.9B in revenue during the most recent quarter and a freight business that did $1.5B in revenue. Add those business units up and it’s a revenue figure that Lyft is estimated to achieve in all of 2023!
On the Q4 conference call, management at Lyft seems steadfast on trying to somehow squeak out more operating leverage from the existing business.
Here’s what Lyft co-founder and president John Zimmer said:
We have three key business initiatives this year, each of which aligns with our strategy to deliver our competitive service levels and capture more demand. First, strengthen our marketplace technology to drive improvements in price and ETA. Second, deliver more value to a growing population of Lyft loyal riders and third, create more opportunities for consistent and transparent driver earnings.
Sounds awesome, except for the fact that Uber can match the company step-for-step in these initiatives. Additionally, these initiatives are something investors would expect the company to be constantly fine-tuning – and not relying on as the key business drivers.
Late last year, the company announced Lyft Media, yet there was no mention of it on the most recent conference call. No mention of an international expansion, new business units, or autonomous vehicle advancements.
Instead, the company’s plan seems to be cutting costs by shifting some support staff to overseas, laying off 13% of the staff and reducing other expenses. Overall, the company has a target to reduce costs $350M annually.
That’s great, except for the fact Lyft has operating loses that exceed $1B+ annually for the past 3 years straight.
Not Worth The Risk
If Lyft management had an aggressive expansion plan or new initiatives that investors could patiently wait to materialize, this stock would be attractive. With a valuation under $4B and 2023 revenues likely to exceed that – Lyft stock is not wildly overvalued.
The problem is there’s nothing for Lyft investors to be excited about. Rival Uber is financially in a good spot and can squeeze Lyft on pricing. The idea Uber would buy Lyft is reasonable, except for the fact the regulatory environment in the United States seems likely to try and block that.
Could Amazon (AMZN), Google (GOOG) (GOOGL) or an automaker make a play for Lyft? Surely it’s possible, but all apparently balked at buying Lyft several years ago. Also, if the best possible outcome for Lyft is to be acquired – that caps the upside of the stock to what a buyer pays. Additionally in this scenario, the investor can be subject to capital gains taxes and/or accepting equity in a new company.
Ultimately Lyft doesn’t have an aggressive enough growth strategy, it has a competitor that is executing ahead of schedule, and cost cutting is not going to do much to improve the financials. I would avoid Lyft until management proves it’s ready to address these challenges.