UBER - Lyft: Metrics Point To Future Being Brighter Than The Recent Stock Action Reflects

Summary

• Lyft's stock is down significantly from its high of $63.
• Lyft's fortunes have slowly started to turn, as cost-cutting measures and increased prices should lead to profitability.
• Their business model is a mixed bag, considering both positives and negatives.
• The company has reasonable long-term potential for long-term investors.

Lyft ( LYFT ) has been struggling since the pandemic, and the stock is down significantly from its previous high of $63. The stock currently trades at around $15-16, significantly lower than its previous levels.

Lyft is clearly showing signs that its business model may finally be at a point where it can be sustainable, create cash flow, and eventually turn a profit. Active riders are still below their previous 2019 high of 22.9 million and are now at 20.3 million as of the latest quarter, and active riders continued to increase quarter-on-quarter, increasing by 0.5 million.

Recovery Leaves Plenty Of Room For The Company To Grow

Questions remain about whether the company can be profitable but, there are clear indications that things are getting better. The latest revenue per active rider is at $52 , which was above $44 which was the rate pre-pandemic. Rideshare conversion continues to be high as well at 70% , with recovery rates ranging from 50% in certain cities to 91%, an average of 60% recovery on the West Coast, and 78% recovery on the East Coast. The current estimates for the global ridesharing potential addressable market are currently standing at around $344 billion , which might be slightly excessive, but in reality, it's likely lower, and growth is likely to be around 8-9%, instead of around 15-16% as they currently project.

The reality is in order for ridesharing to be profitable, including all backend costs, marketing spends, R&D spend, driver costs, and insurance costs, plus the cost of the driver, and upkeep costs to be amortized over many riders (but are still going to at the end of the day be borne by the end user). Currently, the prices justify these costs, but that also means, many people will choose their own vehicles, and many millennials have chosen to increase how many miles they put on their cars, rather than replace their cars regularly, or choose ride-hailing apps.

Lyft Is Headed Towards Profitability

The company is increasingly leaning out its operations and plans to reduce $350 million in costs, which should help it bring it closer to profitability. The company had been on the verge of bankruptcy not long ago, but now is looking at a significant amount of free-cash-flow, and EBITDA going into 2023. The current management guidance points to $700 million in free cash flow. Lyft recognized that it had expanded too quickly and had as big a workforce as was likely unnecessary. The current increase in EBITDA to 7% should translate into an EBITDA of around $1 billion according to management in 2023 .

Analysts are currently expecting the company to produce anywhere from $4.5-4.8 billion in revenue in 2023. That would mean the EBITDA margin would be around 20%. This is highly unlikely and would require a significant reduction in costs. In reality, the EBITDA in 2023 will be around 10%, if the current trend in cost-cutting continues, which would mean, if the management does not cut into 'muscle' so to speak, and only cuts the 'fat', it will be able to run a relatively lean operation. Lyft has been increasing prices over the past few years, and that was expected since there was no way the old prices were sustainable. Furthermore, Lyft's operations were likely bloated, and management is constantly working to get to a point where they can sustain a profitable operation, so the 10% mark seems reasonable, all things considered.

Lyft's Bet On AV Is Unlikely To Payoff Anytime Soon

Lyft, like many ridesharing companies, is hoping that they can eventually have a significant portion of their fleet become autonomous vehicles. But such a hope is quite far-fetched. The technology for AV has been increasingly facing hurdles; when combined with the potential legal liability, and the technology is far from being a reality. 'Level 4' autonomous vehicles are still years away from being a reality, and that will likely mean that Lyft's plan to cut costs by creating a hybrid system will likely not come to fruition anytime soon. An increasing number of car developers are now shutting down their in-house systems, citing extensively expensive costs and unrealistic cost spending with little return on investment.

"In the third quarter, Ford made a strategic decision to shift its capital spending from the L4 [Level 4] advanced driver assistance systems being developed by Argo AI to internally developed L2+/L3 technology," the automaker announced in releasing its third-quarter earnings that reflected a $2.7 billion hit as a result of the decision."

This has been a general trend in the autonomous car world, and it is unlikely we will see AI-driven cars for a long time. As previously mentioned it's not only a problem of legal liability, but also if things go wrong, it's still an issue. Who is responsible if the car's AI system fails? Is it the car manufacturer or the actual company? Questions remain, and the question of becoming fully autonomous is years away. This means that any reduction in the cost structure stemming from fewer drivers is still a while away.

Current Financials, Risks, And Outlook

The current price to sales of 1.3x reflects a valuation that might be inexpensive. Especially considering that the current projection anticipates that revenue will grow by around 15-20% over the coming years. Revenue isn't likely to grow as quickly as people believe, especially as broader market growth faces global recessionary headwinds, as interest rates head towards record highs, which will likely affect unemployment, putting a slight dampener on ride-hailing apps, as we move into the latter part of 2023. This is likely to push growth down to 10-12% when adjusted for slower GDP growth, slowing incomes, and lower unemployment.

Final Word On Lyft

Lyft currently trades at a relatively normal valuation and is likely to see a reasonable level of growth for the next few years. This means that investors can be comfortable investing in the stock if they plan to hold it over the longer term. Ridesharing is essentially a duopoly in the current U.S. market, and Lyft's focus on ridesharing could translate into better overall service for users than Uber (UBER), which has multiple segments. Lyft may not be the high-flying 'tech' stock it once was, but now reflects a market that is a lot more normalized, and less volatile, moving away from the extreme speculation, growth, and general excesses witnessed over the last decade or so.

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