After a bad start, ridesharing platform Uber (NYSE:UBER) is now selling for well above its $45 initial public offering (IPO) price. However, Lyft (NASDAQ:LYFT) — a very similar company — is yet to see its $72 IPO price. But that may be about to change for Lyft stock.
How? After getting a big boost from California’s Proposition 22 — which exempts the company from calling its drivers employees — Lyft opened for trade on Dec. 9 at $47.23 per share. The company currently has a market capitalization of $14.98 billion. Before the pandemic, its revenue for fiscal year 2019 was $3.6 billion.
Now, despite some bad publicity and the effects of Covid-19, Lyft still carries a hefty multiple of over 5 times sales — even though it still hasn’t really made money.
What Analysts Believe About Lyft Stock
Analysts see something that no poor reporter has the power to reason away.
What they see is a spectacular growth curve due to resume next year. That’s because revenue doubled in 2018, then grew another 63% in 2019. Lyft also used the pandemic to cut costs, inviting more bullish sentiment. The company delivered an upbeat financial update to the Securities and Exchange Commission (SEC) a week ago, one month after its third-quarter report.
That Q3 report showed an adjusted net loss of $280 million on revenues of nearly $500 million, down by 47.7% year-over-year (YOY). It was bad but better than expected.
What’s more, the previous quarter’s revenues were just $340 million. Estimates for Q4 2020 put Lyft 13% ahead of the third at $565.3 million. That’s still 44% below last year. But investors buy the future and they like the trajectory of Lyft stock.
Prop 22, Government Contracts and Beyond
This past election cycle, Lyft, Uber and other rideshare companies spent $200 million to overturn Assembly Bill 5, which classified all of their workers as employees. However, it wasn’t a complete victory. Proposition 22 contained some worker protections. So, it will be a model for how the companies confront other states as well as operates under the Joe Biden Administration.
They can afford to compromise, though. For instance, New York regulators imposed a minimum wage for drivers in 2018. That didn’t have a big impact on prices. Yet, as unemployment falls with the end of the pandemic, the company will have to compete for help. Costs for drivers will likely rise.
But analysts note that Lyft’s margins improved during the pandemic. They also see a move of people out of crowded cities and into suburbs bringing the company greater demand. The argument? Lyft does best when traffic levels are moderate, during “off-peak” times.
Additionally, Lyft stock has also gotten a big lift from the the current administration.
How so? The General Services Administration (GSA) will pay up to $810 million over the next five years to expand ridesharing within the government. The GSA says it got a small discount on services, plus a waiver on technology fees usually charged to customers.
Rides will be ordered directly from within federal systems, without having to download a new app. It’s not a huge deal, but it’s an endorsement and a model Lyft can use with other large clientele in the future.
Bottom Line
Lyft stock’s rise assumes that profitable growth is coming soon. Of course, November rides fell as the pandemic’s latest wave came on. So, the fourth quarter may not be as good as both the company and analysts hope. But investors are buying for 2021 ,which should be better.
However, my problem is that you’re paying 5 times revenue for a company that couldn’t make a dime pre-pandemic, when days were flush and everything was going the company’s way. Sure, Lyft has put on financial Spanx and sucked in its chest, but I think the salad days of the gig economy have passed.
On the date of publication, Dana Blankenhorn did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.