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As the Uber IPO Approaches, Lyft Earnings Present Reasons for Concern

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As ride-sharing market leader Uber prepares to offer shares to the public for the first time at a valuation of approximately $90 billion, the first quarterly report from its main competitor Lyft (LYFT - Free Report) shines a light on difficult conditions in the industry.

Though ride-sharing has quite literally reshaped the face of transportation in the US and across the globe, Lyft’s staggering losses and the decision of Lyft management to exclude details about the breakdown of revenues show just how difficult it is to turn all those rides into a profit.

In the first quarter, Lyft took in revenues of $776 million, but lost a total of $1.14B, though after adjustment for one-time items, the loss was $212 million. At $9.02/share, that was well in excess of the Zacks Consensus Estimate for a loss of just $1.12/share, though analysts varied widely in their predictions for Lyft’s first quarter as a public quarter.

Lyft Chief Financial Officer Brian Roberts predicted that 2019 would be  a “peak loss year,” suggesting that the company was on a path toward sustained profitability starting in 2020. Investors were not comforted by the prediction and the shares traded sharply lower.

At a recent price of just $55/share, Lyft is now trading 23% below the IPO price of $72/share when it went public less than 2 months ago - and nearly 30% below first-day highs. 


In addition to the huge net loss – which included significant compensation based expense associated with the offering – Lyft chose not to break out the sources of revenue in the same detail as it had in pre-IPO filings about its results in previous years.

By only revealing the net revenue that flowed to the company from rides, Lyft appears to be intentionally hiding the amount that is paid to drivers for providing the rides. With many drivers at both Uber and Lyft currently protesting the companies’ pricing policies, uncertainty about their ability to continue offering lower prices than traditional taxis - while also recruiting and retaining drivers - spooked investors.

By nature, analysts would always prefer to get the greatest amount of detail possible about a companiy's operations. When a company's management decides to reduce the amount of data it provides, it's almost always viewed as a negative development. 

Both Uber and Lyft avoided offering shares to the public until they had multi-billion dollar valuations, rewarding early venture capital investors, but potentially leaving much less opportunity for buyers of shares on the public markets.

Successful, long-term investors like Warren Buffet and Peter Lynch have frequently espoused the strategy of “buy what you know,” encouraging individuals to own shares of the companies that they themselves do business with and fundamentally understand.

Over the past decade, Uber and Lyft upended an entire industry and became household names by offering customers more convenience and a lower price for rides than taxi cabs.

It’s natural that investors would want to own shares of the companies who provide services that they use all the time.

Unfortunately, as Lyft’s poor performance and disappointing report show, a good product does not automatically translate to a good company.

Though some version of ride-share technology will almost certainly reshape the transportation industry as we know it – especially as autonomous options become commercially viable – the two big industry leaders that are selling public shares in 2019 still represent significant risk to potential investors.

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