The Struggle of Lyft Stock is Not a Mere Coincidence

There are no coincidences in the market. Therefore, I was genuinely surprised that analysts were having a difficult time getting their heads around why Lyft NASDAQ: LYFT stock dropped after the company posted what was seen as a positive earnings report.

Lyft stock tumbled nearly 10% after the stock jumped to $45.58 after their earnings report. The stock closed at $41.44. On November 1, the stock was up about 2.8% but was struggling to climb back to earlier session highs.

Lyft is not yet profitable so, a “good” earnings report means that they are showing that they are losing less money. In the third quarter, Lyft reported a net loss of $463.5 million for a negative EPS of $1.57 on revenue of $955.6 million. Analysts surveyed by FactSet estimated that the company would post losses of $1.66 per share on revenue of $915 million.

The ride-hailing company also reported a positive outlook that confirmed analysts’ expectations for the company to be profitable by the end of 2021.

So why did Lyft drop? Again, there are no coincidences with the market. And Lyft is facing three obstacles: one that is perhaps imagined and two that are very real.

Lyft is in the company of other unicorn stocks

Lyft is one of the “unicorn” stocks that have caught the imagination of investors in the past few years. Unicorn stocks are privately held startup companies with a current valuation of at least $1 billion dollars.

Putting the lessons of the “tech wreck” behind them, many public investors have been bidding the stocks of these companies higher and higher, even those that are not yet profitable. That seems to be coming to an end. And that’s part of the problem for Lyft stock. Investors are demanding (at least) a clear path to profit

 “There’s an utter lack of appetite for unprofitable tech companies,” said Joel Kulina, senior vice president of institutional cash equities at Wedbush Securities. “People just want the year to end, and protect any profits they have, and not try to catch any falling knives.”

What Kulina says may be true. After all, Lyft was not singled out by investors. Several unicorn stocks took a hit. Notably, Lyft’s primary competitor and ride-hailing category leader, Uber NYSE: UBER was also seeing its stock fall. Pinterest NYSE: PINS and Beyond Meat NASDAQ: BYND are two additional recent stock darlings that are seeing their share price punished.

But there are no coincidences in the market. And in the case of Lyft, a positive earnings report may not have be enough to give the company enough distance from other issues.

Lyft is still recovering from sexual assault claims

Back in August, Lyft’s stock dropped after at least seven women came forward with sexual assault claims against Lyft drivers. The allegations were a blow to the company which, in 2017, had trumpeted itself as more “woke” as opposed to Uber which was immersed in its own sexual harassment scandal. Between August 1 and Labor Day, Lyft stock plummeted 24%.

Just as the stock was finding its feet, it was hit with five additional allegations on September 17. The stock dropped another 22% on those allegations to a 52-week low on October 10. Since then, the stock had been in a steady uptrend ahead of earnings.

Worse than the headlines were allegations in the new lawsuits, filed by Levin Simes Abrams, LLP that allege “Lyft’s response to this sexual predator crisis amongst Lyft drivers has been appallingly adequate.”

That’s not a statement that a company recovers from in just a few weeks. This is a claim that can’t be disproved by tests. It has to be proved for months, and possibly years, by the company taking the right actions to regain trust with a core demographic.

Lyft is also facing an increasingly crowded market

Lyft and Uber are coming under increasing pressure as other private companies like GroundLink, Turo, HopSkipDrive, Gett, Lift Hero, Curb, Wingz and UZURV are entering the space.  One thing that’s been keeping competitors away is the lack of a defined cost structure.

Lyft and other ride-hailing services can keep costs low are because drivers are not employees. The model works when drivers have another job that gives them health care and other benefits. But as these services began to catch on, more drivers are seeing Lyft as a bridge, or even a full-time opportunity. In California, Assembly Bill 5 (the “gig bill”), which was passed by the state assembly in May, will potentially change the cost structure for Lyft. Keep in mind, Lyft is already losing billions of dollars a year.

However, once that cost structure is in place, it should invite other – larger - competitors to enter the space. What makes this more intriguing is that some of these companies may be looking to partner with, not compete with, Lyft. Figuring out how to marry software and logistics is probably part of ride hailing’s future. But that may not be great news for Lyft stock.

Of course, you can believe that the stock dropping was just a coincidence. Just remember, there are no coincidences in the market.