LYFT with Nobias technology: Can Lyft Stock Overcome Rising Workforce Related Costs?
Lyft reported earnings in early August, beating analyst estimates on both the top and bottom lines. Jessica Bursztynsky, a Nobias 4-star rated analyst, covered the company’s second quarter report recently for CNBC. In her article, Bursztynsky highlighted Lyft’s fundamental results, saying:
“Here are the key numbers:
Loss per share: 5 cents vs 24 cents per share expected in a Refinitiv survey of analysts
Revenue: $765 million vs $696.9 million expected by Refinitiv
Active riders: 17.14 million vs 15.45 million expected, per StreetAccount
Revenue per active rider: $44.63 vs $45.36 expected, per StreetAccount”
Bursztynsky also highlighted the company’s strong balance sheet, saying, “The company reported $2.2 billion in unrestricted cash, cash equivalents and short-term investments, flat from the prior quarter.” Most importantly, Bursztynsky notes that Lyft posted positive results in the bottom-line, in terms of EBITDA profits, saying, “The company reported its first quarterly adjusted EBITDA profit, posting $23.8 million. That’s a quarter earlier than the company had targeted.” However, even with this surprise profit in mind, Lyft shares fell after the results were posted and this negative momentum has remained in place.
Prior to their Q2 report, Lyft shares were trading for approximately $55/share. Today, LYFT trades for $48.21. A lot of this comes down to the fierce competition that Lyft has against its larger rival, Uber. In her article Bursztynsky points out one issue that the ride sharing companies have is maintaining enough drivers to meet consumer demand. She wrote, “The company has struggled with driver supply and demand imbalances, leading to surge pricing and increased wait times. That, in turn, leads to unhappy customers who could seek out ride services somewhere else.
Green [Lyft’s CEO Logan Green] said the number of drivers increased in the second quarter at a faster pace than in the first quarter. He added the company will continue to invest in driver incentives in the coming quarter.”
Nobias 4-star rated analyst, IAM News, recently highlighted the capital expenditures related to driver acquisition in an article which mentioned that Lyft is ahead of rival Uber in terms of profitability, because of the large investments that Uber has had to make in its workforce. IAM News shed light on Uber’s accelerating Q2 losses (which came in at -$509 million during Q2) saying, “Heavy spending to bring drivers back to the road is to blame for this larger-than-expected loss despite more than doubled revenue as demand is rebounding. “ IAM News noted that Uber increased its driver count by roughly 30% in the U.S. from June to July. Lyft too, is seeing its driver count increase in a major way.
During the company’s Q2 conference call, Green said, “Given strengthening demand, we made significant investments in driver supply throughout the quarter. The number of drivers increased in Q2 at a faster rate than in Q1 and ended the quarter up more than 60% year-over-year. While elevated demand drove higher prices, across the U.S., drivers earned more than ever before. Drivers' average hourly earnings reached an all-time high in Q2.” Green also said, “In the second quarter, we significantly increased our investments in incentives and sign-on bonuses to help us attract, retain and grow hours from drivers to meet strengthening demand.” In short, it’s great that Lyft is able to attract the workers required to keep consumers happy with its service; but it comes with a cost. And, in recent days, we’ve seen more worker related headlines pop up, with Proposition 22 was deemed unconstitutional - this news caused shares of both Lyft and Uber to fall.
Here’s a link to the Reuters report, highlighting this legal decision. Bursztynsky covered the Prop-22 news at CNBC as well. She explained, “California voters approved Proposition 22 by a majority vote in November. The ballot measure effectively exempted several gig economy companies from the state’s recently enacted law, Assembly Bill 5, which had aimed to make their workers into full-time employees.” She wrote that in his ruling, Alameda County Superior Court Judge Frank Roesch, said that Prop-22 “limits the power of a future Legislature to define app-based drivers as workers subject to workers’ compensation law.”
Bursztynsky mentioned that gig-economy companies, including Lyft, spent a combined $200 million promoting the ballot measure. Why was is passing so important to them? Well, as Bursztynsky says, “Classifying drivers as contractors allows the companies to avoid the costly benefits associated with employment, such as unemployment insurance.” Now, with their exemption off of the table, it appears that companies like Lyft could see driver related expenses rise even higher.
Bursztynsky notes that a coalition of gig-economy companies plans to appeal the Judge’s decision; however, until there is clarity of that front, the repeal of Prop-22 represents yet another headwind in terms of profitably operating these business models.
Neil Patel, a Nobias 5-star rated analyst, brings up what may be an even more important headwind to profitability for Lyft in a recent article: the company’s lack of a competitive moat. Patel notes that both Lyft and Uber “went public in the spring of 2019 to a great deal of hype. Their stock price performances, however, haven't delivered for investors. Uber is up a measly 3%, while Lyft is actually down 31%, significantly lagging the broader S&P 500's return during that time.”
And yet, even with this relative weakness in mind, Patel says that he is not interested in buying shares of either company because he doesn’t believe in their business models. Patel wrote, “The ride-sharing industry is a commodity-type business. This simply means that as a customer, I only care for the service that will take me where I want to go the fastest and the cheapest. In other words, I have minimal brand loyalty.” He continues, saying, “The same thing can be said for the drivers. You've probably noticed that many of them work for both Uber and Lyft, and they switch to whichever platform gives them the highest-earning potential at any particular time.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Uber and Lyft must deal with a neverending battle to satisfy their drivers' well-being, something that comes with tremendous costs.” Looking at Lyft specifically, Patel noted that the company’s big driver push during Q2, while necessary, isn’t likely to lead to near-term profits. He said, “For Lyft, money spent on incentives grew an eye-popping 92% quarter over quarter, while revenue rose just 26%. An incredible $375 million was used to attract drivers, which is quite substantial given sales were only $765 million.”
Patel concludes his piece with a strong bearish statement: “Uber and Lyft are no longer private start-ups; catering to public market investors is a different game. They want profits and cash flow, something that still eludes these ride-sharing enterprises. And the way things are going, I don't think anyone knows with certainty when, or if, they'll generate those highly anticipated bottom-line figures.
Think long and hard before buying shares. This is a ride you don't want to take. Overall, most of the credible authors that Nobias tracks disagree with Patel. 92% of the credible authors followed by our algorithm offer a “Bullish” outlook. The average price target for LYFT amongst the Nobias rated credible authors is $75.00/share. Relative to Lyft’s current share price of $48.39, this represents upside potential of approximately 55%.
Disclosure: Nicholas Ward has no position in any company mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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