<p>Should investors buy a stock of Lyft (NASDAQ: LYFT) shares? A better question is whether they should catch the falling knife in the Lyft stock. The coronavirus crisis is a terrible development for the rideshare giant. First, who wants to ride in a shared vehicle in this environment? Second, with public spaces being shut down by government officials, there is less need for rideshare services.
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But things were not so hot for Lyft before the outbreak. The company’s continued operating losses were still an important risk factor. Regulatory risks related to the company’s employment policy were another negative point. Add competition from its larger counterpart, Uber (NYSE: UBER), and it was already difficult to see how the Lyft share could rise much further.
Nevertheless, the recent sale of the shares can offer investors a convincing starting point. With $ 2.85 billion in cash, Lyft could have enough of a war chest to ride out the storm. And with its valuation under Uber, its shares could be a steal for under $ 20 per share.
Let’s take a closer look.
Given the outbreak and the governments’ reaction to it, the service economy is in trouble. People are afraid to go out. Local authorities put public premises in place. Companies are proactively closing their doors.
But how will this situation affect Lyft? With no places to go, who should use a rideshare service? Lifting requirements will strike a blow. But will this short-term hiccup become a long-term issue for the company?
As a Seeking Alpha contributor recently discussed, coronavirus can damage the rideshare business model. What happens if more people in urban areas choose their own vehicles instead of rideshare services? It is possible that the fear of the outbreak will make people more cautious about using Uber and Lyft in the long run.
Granted, this is not a very likely scenario. Yet coronavirus has shown the modern economy of our modern economy. New technology can “disrupt” older ways of doing things. But black swan events like COVID-19 disturb a little bit of themselves. In a highly connected world, things can be activated for a penny.
However, it is important to distinguish irrational fear from rational caution. Yes, rideshare services will be affected by the crisis. But I do not see the whole industry deteriorating overnight.
On the other hand, this latest headwind exacerbates the sector’s previous downside risks. The industry’s profitability challenge, as well as the risks that regulators will see in changing its working methods.
The current crisis unites the sector’s previous headwinds
COVID-19‘s impact on rideshare demand only increases the problems that are lacking in the industry. First, the industry lacks a path to profitability. In their quest for growth, investors put profits on the back burner. The whole dissertation behind Lift stock and Uber “played the long game.”
By that I mean that the rideshare industry is sacrificing short-term gains for long-term market dominance. Through underpricing of taxis and other car services, Lyft and Uber hoped that their market share would quickly increase and drive the older players out of business. But while Lyft and Uber have done damage to the old school industry, they have not been able to distribute their increased market share to profit.
It seems that the higher Lyft gets revenue, the more money it loses. Since 2016, the company’s revenue has increased from $ 343.3 million to $ 3.6 billion. But in the meantime, its net losses have grown from $ 682.8 million to $ 2.6 billion. While its losses have decreased relative to sales, when will it be profitable?
At the end of last year, the company expected to reach profitability in 2021. But with the latest problems affecting the economy, is that timeline still intact? All bets are off.
Another key factor working against Lyft shares is work wind. As I discussed back in January, the backlash against the rideshare companies ‘labor policies could lead to an increase in their drivers’ salaries, either as a result of government action or public pressure. In any case, the sector’s business model faces challenges.
Some say that autonomous vehicles are the answer. Still, such a pivot would move existing outsourced functions to the company’s balance sheet. In other words, Lyft would trade its “asset light” model for one with greater capital intensity.
Lift Stock looks “cheap”, but be careful
Last summer, Lyft shares were sold at a similar valuation as Uber. No longer. The lift share is sold at a company value / sales ratio (EV / Sales) of approximately one compared to 2.3 for Uber.
With this discount, Lyft looks cheap. But the shares can be even “cheaper”. While Lyft shares can be set for an epic recovery when coronavirus fears fade, it’s hard to see if things will get worse before they get better.
Investors should keep the Lyft shares on their radar, but they should not invest the farm at today’s prices. It remains to be seen how the outbreak will affect the company. Either its losses will be accelerated or the outbreak will just be a hiccup on the road to profit.
Thomas Niel, contributor to InvestorPlace, has been writing a one-share analysis for web-based publications since 2016. At the time of writing, Thomas Niel had no position in any of the above-mentioned securities.