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Lyft Stock Is the Hyper-Growth Play in Ride Hailing — Not Uber

Luke Lango

It’s fair to say that life on Wall Street has been anything but dreamy for ride-sharing giant Lyft (NASDAQ:LYFT). Lyft went public at $72 per share in late March. On its first day of trading, LYFT stock reached a high of $89. That was as high as LYFT stock ever got.

While Lyft Stock has Potential, the Near-term Risks Outweigh the Upside

Ever since, it’s been nothing but pain for Lyft. LYFT stock has tumbled from that near $90 high on day one, to $45 today. That’s a 50% wipeout in LYFT stock over the past six months.

Thus, LYFT stock is unequivocally down. But it’s not out just yet.

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The long-term fundamentals underlying Lyft still point to big growth over the next decade. Today, very little of that growth is being priced into LYFT stock. That’s because investors are concerned that the ride-sharing company may never turn a profit. Such concerns are overstated. They will pass. Once they do, the optics should improve here. Improving optics will subsequently converge on favorable long-term growth fundamentals, and LYFT stock should bounce back in a big way.

That being said, LYFT stock may not turnaround right away. Patience is required here. This is a long term investment — not a short term trade. Ultimately, long-term investors should be handsomely rewarded for their patience.

The Growth Fundamentals Underlying Lyft Remain Favorable

The growth fundamentals underlying LYFT stock remain favorable in the big picture and ultimately imply that the stock will run significantly higher in the long run.

There is a very simple growth narrative at play here. Specifically, for economic and convenience reasons, consumers throughout the U.S. and Canada are pivoting to ride-sharing. That doesn’t mean they are entirely ditching their cars. Some consumers are. Most aren’t. Instead, most consumers are simply using ride-sharing services with greater frequency in instances where driving yourself doesn’t make economic or convenience sense — such as taking a one-way trip to the airport, taking a trip to downtown where parking is difficult and expensive or taking a trip to a bar where driving back would not be safe or legal.

In numbers, this shift towards ride-sharing is playing out rapidly. In 2018, 36% of American adults had used a ride-hailing app of some kind. This is up from just 15% in 2015. Over the next several years, this penetration rate could easily swell towards 50% as more and more consumers come around to the indisputable economic and convenience advantages of ride-sharing services in certain situations.

Thus, ride-sharing projects as a huge growth market for a lot longer. In that huge growth market, Lyft is the hyper-growth player. Lyft has been consistently winning over market share from ride-sharing leader Uber (NYSE:UBER) over the past several years. This dynamic has persisted as of late. Last quarter, Uber reported 14% revenue growth. Lyft reported 72% revenue growth in the overlapping period.

Big picture, Lyft is the hyper-growth player in a secular growth market. Ultimately, that means that this company projects to be a big growth company for a lot longer. Big growth companies tend to be accompanied by rising stock prices — LYFT stock won’t be an exception to that trend.

Near-Term Concerns Are Overstated and Should Pass

At the current moment, most people aren’t doubting the revenue growth potential of Lyft in the long run. Instead, they are questioning if that big growth will ever translate into profits, let alone sizable profits.

These profit concerns are short-sighted and ephemeral and will ultimately pass over time.


Simply consider the unit economics here. In fiscal 2018, Lyft collected about $13 in bookings for every ride — that is, the average Lyft ride cost customers about $13 in 2018. Of that $13 Lyft collected in bookings, about 75% went to the driver and 25% came to Lyft as revenue for average revenue per ride of ~$3.50. Total opex per ride in 2018 was about $5, so for each ride Lyft provided in 2018, the company lost about $1.50 in operating profit.

That’s ugly. Add that up of over millions of rides, and that’s how you get Lyft’s huge losses every quarter. Investors don’t see any end to this in sight — because the unit economics aren’t improving all that much with scale — and that’s why LYFT stock has plunged.

But these unit economics aren’t supposed to improve right away. Instead, right now with the ride-sharing market in hyper-growth mode, Lyft should be focused on spending an arm and a leg to win as much share of that market as possible.

Eventually, all this growth mania will subside. When it does, the North American ride-sharing market will rationalize, and Lyft won’t have to spend an arm and a leg anymore to win share. That’s when the operating leverage kicks in. Opex per ride will drop. Revenue per ride won’t. Operating losses will turn into operating profits, and all these long-term profitability concerns will fly out the window.

Bottom Line on LYFT Stock

At current levels, LYFT stock is a compelling long-term buy. But patience is necessary. Presently, the market is irrationally fearful regarding Lyft’s long term profit growth prospects. Such concerns misunderstand the timing of when operating leverage should kick in for growth companies. But even so, such concerns will stick around so long as Lyft’s margins remain depressed.

Thus, before buying the dip in LYFT stock, it may be wise to wait for the margin numbers here to convincingly turn a corner.

As of this writing, Luke Lango was long LYFT.

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