Since going public last year, Lyft Inc. (LYFT, Financial) has struggled to demonstrate the long-term financial viability of its ridesharing business model. As evidence of its challenges, pessimists have pointed frequently to Lyft’s hefty operating losses and fiercely competitive environment (for both drivers and riders), as well as the mounting legal and regulatory threats that have the potential to derail its contractor-based business model. Nonetheless, Lyft has persisted in its promise that profitability is in sight.
Race against the analysts
Unsurprisingly, Wall Street analysts are divided on the subject of Lyft’s business model, and its eventual probability. The aggregate consensus foresees a profit inflection in 2022, however, probably in the fourth quarter. But that is far too pessimistic a forecast, according to Lyft co-founder and CEO Logan Green. Speaking at the Wall Street Journal’s Tech Live conference in October, Green insisted that his company would be profitable a year ahead of Wall Street’s schedule:
"We've never laid out our path to profitability, and we know that's a question on a lot of investors' minds. We're going to be profitable on an adjusted EBITDA basis a year before analysts expect us to."
While an aggressive target, Lyft has reiterated the point a number of times in the months since. Clearly, management can see that the writing on the wall for companies that can only grow their top lines, as Green admitted to his audience at Tech Live:
“I think the market as a whole has changed. There has been a major shift from investors valuing growth to going to value stocks. That shift has had very broad implications that have impacted us.”
Improving economics
There can be no doubt that Lyft has made progress toward its goal of economic self-sustainability, trimming its losses in the the second half of 2019.
Lyft managed to beat expectations in the third quarter, reporting $955.6 million in revenue ($916.2 million expected). This translated to a smaller-than-expected loss of 41 cents per share (72 cents per share loss expected). Revenue per active rider, an important industry metric, also showed improvement, rising to $42.82 for the quarter, compared to $33.63 over the prior-year period. In the earnings press release, Green declared that the result “demonstrated the significant progress Lyft has made on our path to profitability.”
On Feb. 11, Lyft reported earnings for the fourth quarter, again beating on both top and bottom lines. While analysts expected $984 million in revenue, Lyft managed to book a record $1.02 billion. An adjusted Ebitda loss of $130.7 million translated into a loss of $1.19 per share ($1.39 per share loss expected). Revenue per active rider also rose marginally from the previous quarter to $44.40. During the subsequent earnings call, Chief Financial Officer Brian Roberts reiterated the profitability target of fourth-quarter 2021, insisting that Lyft is “stretching every dollar” to improve operating margins.
Lyft has offered forward guidance for the first quarter of 2020. It anticipates revenue of $1.06 billion and an adjusted Ebitda loss of between $140 million and $145 million.
2020 vision
Lyft’s full-year guidance for 2020 calls for revenues to fall between $4.58 billion and $4.65 billion, which is in line with analyst estimates. It also expects an adjusted EBITDA loss of between $490 million and $450 million, which is considerably better than the $503 million loss analysts had anticipated.
With less than two years to achieve its profitability goal, Lyft has a lot to prove in 2020. Despite beating analyst expectations in the fourth quarter, the company's stock still fell after reporting earnings this month. That is a clear reflection of the high expectations underpinning Lyft’s $13.65 billion market capitalization. The company’s target of achieving profitability in 2021 has also been integrated into a number of analysts’ models and price targets. Guggenheim’s latest note on the name offers one such example of this:
“We see it as acceptable for a #2 player like LYFT to tilt strategically more towards growth and market share, as long as it is still on track and progressing towards EBITDA positive at some point in 2021.”
What this means is that investors should expect market expectations to be even higher in the year ahead.
Verdict
While Lyft’s promise of profitability within the next two years has excited investors and juiced up its share price, actually achieving it is going to be a challenge. While it has been able to pare its losses somewhat in 2019, Lyft still expects a hefty loss in 2020.
The company is playing in a highly competitive industry that may threaten to track toward commodity pricing. Legal and regulatory clampdowns on the employment treatment of contract workers could also threaten Lyft. Indeed, they could actually wreck Lyft’s entire business model.
Moreover, even if Lyft does manage to become sustainably profitable, the economics of the ridesharing industry make its lofty market capitalization highly suspect. Competitive pricing may squeeze out most of the margins that bullish investors now anticipate.
With so many challenges and question marks surrounding it, Lyft is not a stock worth owning.
Disclosure: No positions.
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