After Lyft (LYFT) reported earnings, the market got notably more bearish on the company’s outlook. Lack of certainty on the top-line rebound from the pandemic and an enormous unrelated headwind in the state of California are weighing on investor sentiment.
The stock fell as much as 5% Thursday, before the loss moderated to 3.3% to $29.48 a share in the afternoon. The stock now trades at roughly 2.3 times 2021 revenue estimates, using FactSet consensus expectations. And the calendar year of 2021 is expected to be the full rebound year, in which revenue will hopefully hit roughly its 2019 — or pre-virus — level. The estimate is now for $3.75 billion, or a 48% year-over-year growth rate, reflecting a return to normal life as a growth company in a generally expanding business.
The current valuation seems to imply the market is extremely bearish on Lyft. The multiple on 2021 is maybe a tad low, especially if we are to assume investors are placing a normal multiple on the rebound year of 2021, not the lost year of 2020. But it’s also below 3 times just the next 12 months of revenue, whereas Lyft has often traded at above 4 times in its short history as a publicly traded company.
The market is demanding an uncertainty premium on Lyft.
Investors won’t pay up for Lyft until they have more certainty that riders will get back in the car at the rate they were pre-pandemic.
Before we dig in, here are the earnings results against Wall Street estimates:
- Revenue: $339M v. $339M (actual result: -60% year-over-year)
- Total Riders: 8.69M v. 9M (-60%)
- Revenue Per Active Rider: $39 v. $38.2 (-1.9%)
- Adjusted EBITDA: -$280M v. -$291M (last year: -$204M)
- EBITDA Margin: -82 v. -85% (Last Year: -23%)
- GAAP Loss Per Share: $1.41 v. $1.53 (last year: 68 cents)
And although management said recent weeks have shown a 78% growth rate in rides over the terrible month of April, the company did not issue revenue guidance and the rate of recovery is slower than investors had desired to see. The company did post a narrower net loss than expected as its cost management was strong. Clearly, the company can whether the storm, so long as the storm doesn’t rage for too long.
But “the rate of recovery is slow, the sector appears to be leaning back into incentives to stoke growth,” wrote RBC Capital Markets analyst in a note. Rides were down 53% in the last week, analyst Mark Mahaney noted, showing an improvement, but that’s against analysts estimates of a 43% decline for the third quarter. These points potentially undermine Lyft’s ability to reach 2021 levels of revenue, which hurts the stock on a near-term basis, and also perpetuates the dynamic in the market that calls for that uncertainty premium.
Positively, management said it can reach profitability on an adjusted EBITDA (earnings-before-interest-tax and non-cash expenses) basis by the fourth quarter of 2021 with 25% less revenue. That’s hard to do for a company trying to scale and reduce marketing spend while growing revenue. Analyst revenue estimates for 2021 have only come down by about 7% so far, pointing to a profitability picture on schedule. This is certainly supportive of the stock, but for a company indeed still unprofitable, the sales trajectory is a huge key, since most apply a multiple to sales, not some earnings number off in the distant future.
And on that sales trajectory, "We’re taking a worst-case scenario approach,” Wedbush Securities analyst Dan Ives told TheStreet. "That’s the best way for investors to think about the move.”
First off, Ives says his work shows that a third of consumers likely won’t get into a Lyft or Uber (UBER) without a vaccine in play, which makes it only prudent for ridesharing investors to assume a vaccine doesn’t hit the market any time soon. Secondly, Ives notes the uncertainty premium investors are demanding on Lyft, which isn’t likely to change in the very near-term. With a bearish near-term approach, "I’d rather investors do a worst-case stress test, see just how bad ride share numbers could be and we believe the risk reward is still attractive here.” He thinks long-term investors could easily start picking at the shares at this level.
But then there’s the California issue.
Lyft may very well temporarily pause its California operations if courts ultimately uphold a recent ruling that drivers should be classified as employees, not contractors. That would make it incredibly difficult for Lyft to run a profitable California operation. Ives says California has recently been running at roughly 16% of Lyft’s total rides, down from the usual 20%, as the state struggles to control the coronavirus. That doesn’t exactly equate to 16% to 20% of revenue, but it likely comes close to that figure. Ives, citing the California issue and the general road to recovery issue, lowered his 2021 revenue estimate by 41% to $3.23 billion. He only lowered his price target by 22% to $37 a share. Notably, he is optimistic on profitability, certainly for the full year of 2022, based on the model in his post-earnings note.
But Ives’s price target is also held back by a 2 times multiple on 2021 revenue, as he essentially prices in some uncertainty on his long-term projections.
The point: if Lyft can whether this storm, the stock could be a long-term buy, but don’t expect an easy ride in the near-term.