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Bull Of The Day: Lyft (LYFT)

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Lyft (LYFT - Free Report) has lost 55% since its Q4 earnings on February 11th. The initial drop-off was an over-exaggeration by the markets, and the coronavirus continues to pull these shares down to their lowest levels since the stock went public last year. I think LYFT has been unjustly sold-off well below its intrinsic value. Analysts remain optimistic about Lyft in the face of the coronavirus panic, pushing this stock up to a Zacks Rank #1 (Strong Buy).

Coronavirus Impact 

The coronavirus has caused indiscriminate selling across all industries, with unprofitable holdings getting hit the hardest. This panic-driven market has hammered Lyft and its profitless operations. Investors are dumping LYFT under the notion that the populous will stop using ridesharing services in the wake of this virus.

Ridesharing volume has been up in the beginning stages of this virus’s spread, and both Uber & Lyft have reiterated their 2020 guidance. Individuals are using Lyft and Uber increasingly to avoid public transportation, where the spread of this new pathogen seems more likely.

This temporary boost in ridesharing will likely fade if the virus’s transmission proliferates in the US, which many specialists are anticipating. People have already been increasingly working from home, and this trend will likely continue. I don’t expect that ridesharing will diminish all together as it is perceived safer than public transit with this virus on the loose. I suspect that temporary short-term headwinds in this segment will only remain until the coronavirus is under control.

The amount that LYFT shares have been punished is far from justified, and I think this stock is ripening as an excellent buy for your long-term portfolio.

Recent Earnings

Lyft reported excellent financials in its Q4 earnings, not only breaking through the $1 billion quarterly revenue mark but destroying EPS estimates by 28%, narrowing its losses. The company beat on every metric and management raised its guidance for 2020. This seemingly good news wasn’t good enough for investors, and LYFT fell almost 10% following these strong results.

For these unprofitable ridesharing companies, forward guidance is much more important than past quarter results. Uber (UBER - Free Report) and Lyft have been pushing growth no matter what the cost since their inception, now investors want to see this growth turn a profit. These firms can’t continuously burn cash as they have in the past. It’s time for these ridesharing giants to show their savvy management ability and demonstrate profitable growth.

Lyft’s earnings disappointed investors because of the high they were riding following Uber’s profitable growth story it depicted in its Q4 earnings call. Investors wanted more from Lyft’s earning, specifically its timeline to profitability, which now sits behind Uber’s.

Conservatism is what Lyft does best with a big top and bottom-line beat on its last 3 earnings reports. I don’t think that the shares’ massive drop off is warranted, and this could be a buying opportunity. I see Lyft and Uber hitting profitability at similar times based on how these firms have progressed and Uber’s lack of conservatism.

Ridesharing Duopoly

Uber and Lyft are in a competitive duopoly where predatory pricing is used to secure customers. I can attest to this here in Chicago where most people I know check both Uber and Lyft for the best pricing before deciding on which service to use. This is causing these firms to undercut each other into losses.

Uber has a much more diversified portfolio of services, which you would think would give them a competitive edge over Lyft, but I am starting to think it’s going to be the company’s downfall. Uber’s other bets, such as Uber Eats and Uber Freight, are both competing in increasingly competitive spaces. These segments are driving down margins as they lose an increasing amount every quarter.

Uber is still liquid enough to have no concern about bankruptcy quite yet, but its lack of a profitability timeline worries me. Cash is being hemorrhaged from Uber at an increasing rate, and I don’t think they have as many years as they believe in figuring out how they are going to turn a profit.

Lyft’s (nearly) pure-play ridesharing strategy is looking like a competitive edge as its losses continue to narrow every quarter.

Take Away

LYFT is a falling knife right now, and I would not suggest putting any position on the company quite yet. The stock has a high beta, so its risk in these volatile times is high. This is an investment that has fallen to a substantial discount of what it had once traded at, and I would consider buying it once the markets turn. 

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