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Lyft: Don't Chase This Stock

Lyft is one of the most overvalued stocks around.

Lyft’s  (LYFT) - Get Lyft Inc. Report shares are down more than 40% since the company's IPO earlier this year. This is while the S&P 500 is having a strong year and is up approximately 10% over the same time period.

Nevertheless, despite having fallen from grace, Lyft is no value stock. With falling revenue growth rates, rising competition and an overvalued stock, this opportunity is best avoided. Here’s why:

Revenue Growth Rate Is Slowing Down

The message from Lyft is that it is firing on all cylinders and reaching key milestones ahead of target.

Lyft Chart Revenue

But skeptical investors might instead appraise Lyft’s declining revenue growth trajectory, and feel uneasy about the rapid pace of revenue growth deceleration. Specifically, Lyft started Q1 2019 growing at 95% year-over-year; however, it's guided Q4 2019 now points to approximately half this growth rate at just 47% (at the high-end of guidance).

Lyft is outspokenly proud that its revenue growth is being driven through an increase in revenue per active rider, as well as strong growth in the number of active riders.

Lyft Chart Revenue

The Multiple Reflects Opportunity

Lyft’s mission is to be the world’s best transportation network. And given the strong growth in this sector, investors are still giving Lyft the benefit of the doubt and rewarding its shares with a high multiple.

The problem is that a combination of easy money and technological innovation has brought on the rapid proliferation of competition.

Even though early consumers might have sought out Lyft and remained loyal given the familiarity with its service, over time, convenience will only offer Lyft a small competitive advantage. 

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In time, riders will seek out the cheapest means of transport. Compounding troubles for Lyft is that Uber  (UBER) - Get Uber Technologies Inc. Report is an incredibly aggressive competitor, steadfast on growing its own revenues, and will seek to outcompete Lyft on its home turf.

For now, Lyft operates predominantly in the US and more recently in Canada. Will Lyft succeed in growing its international presence? On paper, it would not be too challenging for Lyft to replicate its business model abroad.

But if ride-sharing is competitive in the U.S., it’s equally, if not more competitive overseas, with each big market already having one or more ride-hailing services.

Valuation - No Margin Of Safety

Lyft Chart Peer Group Valuation

For now, investors are happy to pay a punchy multiple of 4.1x sales for Lyft as it plows ahead with its growth-at-any-cost strategy.

Moreover, Lyft notes that by Q4 2021it expects to be adjusted EBITDA profitable. This implies that investors are only being asked to endure a few more years of losses before Lyft carves out its path to profitability.

The next question, then, is what sort of profit margins should investors expect from the ride-sharing giant? Should they be content with a 5% profit margin? And does this figure include management’s heavy stock-based compensation?

Assuming that Lyft’s Q4 2019 growth rate of Q4 2019 was to continue throughout 2020 and 2021 at approximately 50%, which is very unlikely, then 2021 would see Lyft’s total revenues hit $8 billion. With a generous 5% GAAP operating margin, Lyft’s operating profits would still not reach $425 million.

The Bottom Line

Lyft has a lot of potential and is likely to be a huge benefit for commuters. 

But investors paying an approximately $13 billion market cap for a company that may (or may not) hit less than $425 million of operating profits more than two to three years out is a huge price to pay. At this valuation, investors are more likely to exit with a permanent loss of capital. Readers should avoid this stock.