UBER - Lyft Has Plenty Of Upside Potential Starting 2023 Near All-Time Lows

Summary

• Lyft is heavily discounted to peers and offers as much as 60% upside to trade closer alongside Uber in our view.
• Lyft is closer to long-term continual profitability than competitors and trades near all-time lows.
• The company continues to operate within Uber's shadow and risk of losing market share is ever present.
• Therefore, it would be wise in our view to hedge a bet in Lyft with a small investment in Uber as well.

Lyft Stock Trades At A Discount Starting Off 2023

Lyft, Inc. ( LYFT ) is a ridesharing company based in San Francisco, California. It operates in over 650 cities in the United States and Canada. Lyft was founded in 2012 by Logan Green and John Zimmer as a way to reduce congestion and pollution in cities by providing a convenient, affordable alternative to car ownership. Since going public in March 2019, Lyft's stock has drastically underperformed the market. The stock is down ~85% since its IPO, while the S&P 500 is up 17%. However, we believe Lyft is a buy for the following reasons:

1) Lyft is the clear leader in the U.S. ridesharing market behind Uber ( UBER ) with a market share of nearly 28% (Figure 1) .

2) The company is focused on reducing its losses and is on track to be far more profitable than competitor Uber.

3) Lyft has a strong balance sheet despite trading downwards almost as if they are heading for bankruptcy with ~$1.7 billion of cash.

4) The ridesharing industry is still in its early stages of growth and we believe Lyft will benefit from the secular increase in demand

Figure 1. Lyft has fallen to a clear number two to Uber struggling to hold market share

If Lyft performs along with analysts' estimates in 2023, we believe the stock could easily have room to double as even above the $20 mark Lyft is cheaper than Uber on paper. The bear case for Lyft is that the strength of Uber will stamp out the company's future growth, but we believe a monopoly in the ridesharing market is unlikely due to the way competitive pricing on the platforms is laid out.

Current Valuation Allows The Stock Price To Be Lifted Higher In 2023

It's no secret that Lyft has been struggling as of late. The company's stock price has plummeted over the last year and it is now facing stiff competition from other ride-hailing apps (Uber & Grab ( GRAB )). But despite all of this stock market pessimism, Lyft still remains one of the most popular ride-hailing apps in the United States. Lyft's current undervaluation provides a unique opportunity for investors. The company is still generating a lot of revenue (nearly $5B estimated this upcoming year) and it has a loyal customer base. If Lyft can continue to deliver on earnings the stock could easily turn things around and price could rebound. Lyft trades at price to sales below 1x revenue (Figure 2), significantly below competition and is the only name in the group that has already shown they can deliver consistent positive earnings.

Figure 2. Lyft is undervalued in comparison to other app driven technology leaders from both a price to share standpoint as well as a price to earnings view

Lyft's undervaluation to competitors hints at as much as 60% upside to trade alongside behemoth Uber. Uber does have considerably stronger market share and growth and therefore should not be overlooked at their own discounted prices as well. Therefore, we believe a smart investment in the ridesharing department includes both Lyft, the more undervalued number 2 player AND Uber the undeniable leader and disrupter. Lyft's IPO valuation was ~$24.3B, and it is currently now trading at just ~$4B. Given the current overly bearish state of the markets as well as the continued & growing need for ridesharing, we believe that Lyft is currently undervalued. We recommend that potential higher risk investors look at it as an option for a small tech position in their portfolios diversifying the play with a fraction of the investment also going towards competitor Uber.

Risks

The following are some, but not all, of the main risks involved in investing in Lyft's stock in our view:

1. Lyft has been profitably for a very short run of time. Cash has come to question of late with the effects of interest rates, driver pay, and potential taxi fares always in the spotlight for rideshare names.

2. Lyft faces tough competition living in Uber and taxi companies' shadow. It is possible that Lyft will not be able to compete successfully and will slowly lose market share.

3. Lyft is heavily reliant on its drivers. If drivers leave the company, demand higher pay, or are not able to meet customer demand & growth, it could adversely affect the company's business.

There are risks involved in investing in any rapidly growing tech company, and in our opinion the risks in investing in Lyft have actually been a little overstated due to the media spotlight often shown upon them and Uber. The company does have debt of over $1B and this should be monitored going forward.

Overall Takeaway

In conclusion, Lyft's stock is a buy for a variety of aforementioned reasons. The company is growing at a rapid & steady pace, they have a unique, strong brand second only to Uber, and they are technology leaders in the rideshare industry. Furthermore, Lyft's stock is undervalued against all public competition and therefore deserves to be looked at as an investment option for higher risk portfolios in 2023. We will be looking to pick up shares below $10 and holding with a price target of $15 which is conservatively achievable in the right macroeconomic environment by early 2024. Other partnerships and opportunities such as autonomous driving provide further long-term upside for the stock beyond a 1-1.5 year timeframe.

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