Don’t Buy the Idea of a Lift in Lyft Stock

Lyft (NASDAQ:LYFT) reported earnings on August 12. The company posted lower revenue (as expected). However the ride-hailing company was able to beat on earnings due to cost-cutting measures. LYFT stock fell over 5% in after-hours trading.

However, after opening lower, the stock is still holding on to a small gain for the month. And there is some belief that the stock may start to rally. In fact, the consensus price target among 36 analysts is showing the company’s stock has a potential upside of over 55% from its current level.

So is Lyft a buy on the dip candidate? Simply put, no. And there are several reasons for this.

Revenue has not recovered

First, don’t let the increased revenue fool you. Lyft reported that it had 75% more revenue in July than in April. But if you’ll allow me to be cynical, that’s the oldest trick in the book. You compare something that’s bad with an unmitigated disaster and you declare victory. I’m not saying that Lyft was doing that intentionally, but it has the same effect.

The number that matters is that quarterly revenue was still down 61% on a year-over-year basis at $339.3 million. And active riders were down 60% on a year-over-year basis, falling to 8.7 million. This was below the 10.5 million that analysts had expected. Both of those numbers throw a bit of cold water on the “only” 2% drop in revenue per active rider.

Lyft is a pure-play ride-hailing company

Second, Lyft is a pure-play ride-hailing company. Uber (NYSE:UBER) is having its own problems. Uber gave an equally dour earnings report last week. But the company is having some success with its Uber Eats program. But let’s be clear. Food delivery is not a profit magnet for Uber. While the company posts a 6.3% profit margin on rides, it loses money on delivery.

Legal battles continue to hang over the company

Third, Lyft just joined Uber in threatening to leave California due to a recent court ruling that would require ride-hailing companies to classify their drivers as employees. As I’ve discussed many times in the past, the business case for ride-hailing is not meant to accommodate full-time drivers. The model falls apart completely when what is supposed to be a simply software solution turns into a full-fledged logistics operation, complete with salaries and benefits.

Will riders feel safe?

And finally, the problem that Lyft will have to overcome is not just a question of the economy turning around. The other question is will consumers be comfortable getting in someone else’s car? We are all being conditioned to become a nation of germaphobes. We know how clean (or not) our car is. But can we have the same assurance that our Lyft driver will follow all the protocols.

Which brings us back to the question of Lyft drivers being employees. Ironically, if the company’s drivers were employees, Lyft would have more leverage to ensure they don’t just have access to cleaning supplies and PPE, but that they are actually using the equipment.

Lyft simply faces too many headwinds

The simple reality for ride-hailing companies is they face multiple headwinds to get back to any semblance of its pre-pandemic revenue. First, it’s likely that many city residents may be working from home for the foreseeable future. Part of living with the novel coronavirus is realizing that it tends to have a higher spread in densely populated areas.

There are a number of businesses that are already making plans to move jobs such as data center and customer service workers to full-time remote work. It is tough for companies to provide appropriate social distancing measures for these disciplines.  

Second, even if (and that’s a big if) consumers are willing to use a ride-hailing service where are they going to go? Once again, we do have to learn to live with the virus among us. But part of that living with us means avoiding large gatherings or enclosed areas like restaurants and bars where there is a greater probability of the virus spreading.

Many millennials that makeup the ride-hailer’s core demographic are beginning to buy homes. This means that first, they’re perhaps fleeing the cities that they embraced just a few years ago. And when they do, they will probably be purchasing a car.