The novel coronavirus pandemic has fundamentally reshaped our society over the past few months. One big change has been that the ride-sharing market has all but died across the globe. Lyft (NASDAQ:LYFT) has really suffered as consumers are staying at home and remain wary of getting into a car with a stranger. Lyft stock has fallen off a cliff in 2020, from $50-plus prices in February, to sub-$30 prices today.
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So is this really the beginning of the end for Lyft? Is this company doomed to fail as consumers socially distance themselves forever?
No and no. Instead, while 2020 will be a rough year, Lyft still has a bright future, and LYFT stock will rebound dramatically from this sell-off over the next few years.
Here’s three big reasons why:
- The ride-sharing market is only temporarily dead. Virus fears will abate. Consumer activity will normalize. The ride-sharing market will bounce back.
- Lyft is doing everything right to not just survive the Covid-19 crisis, but actually come out the other side a stronger, leaner, and more profitable company.
- Assuming ride-sharing growth trends do normalize to some capacity, LYFT stock is dramatically undervalued today, with 300%-plus upside potential over the next several years.
Lyft Stock and the Future of Ride-Sharing
There is a thesis running around Wall Street that the ride-sharing market may permanently die as a result of the novel coronavirus pandemic. That is, consumers will forever remain afraid of getting sick, from either Covid-19 or some other virus, and this fear will forever keep them out of strangers’ cars.
This thesis seems unnecessarily short-sighted.
Consumers will not forever remain afraid of getting sick. For two big reasons. First, there won’t be much reason for consumers to be afraid of Covid-19 once we get a fully functioning and scalable vaccine, which seems likely by either late 2020 or early 2021. Such a vaccine will reduce the lethal risk of Covid-19 to levels similar to and potentially below that of the flu.
Second, history says consumers have a short-term memory. The Spanish Flu of 1918 didn’t permanently change consumer behavior. Nor did the SARS pandemic in China in 2002. And, speaking of China, consumer activity over there is already starting to normalize as Covid-19 risks have abated.
In other words, mass consumer fear of Covid-19 will pass. Maybe even by next year. Once it does, the ride-sharing market will rebound, supported by increasing global demand for affordable, convenient, and on-demand transportation.
Successfully Navigating Through Covid-19
Lyft is successfully navigating through the Covid-19 crisis to both: 1) weather the huge financial storm the virus has brought upon the company, and 2) emerge from the crisis as stronger, leaner, and more profitable.
On the first point, Lyft is rapidly cutting expenses in 2020 to reduce its cash burn rate. Management said they expect to remove approximately $300 million from their annual expense run-rate by the fourth quarter of 2020, relative to original expectations.
Such cost-cutting measures make the company’s $2.7 billion in unrestricted cash and short-term investments on its balance sheet seem like more than enough resources to absorb sizable losses for the next few quarters.
On the second point, Lyft’s cost-cutting measures are more than just a near-term fix. Management believes these cost-cuts, along with reduced promotional activity, are the first steps in streamlining the company’s cost structure and improving margins.
From the first quarter conference call: “The actions we’re taking now in response to COVID-19 will give us an even leaner cost structure and better margins when we are past the crisis.”
In other words, Lyft won’t just survive this crisis, the company has a unique opportunity to emerge from it a better, stronger, and more profitable company than it was before.
Significant Long-Term Upside Potential
Assuming ride-sharing demand does rebound by 2021 and that Lyft’s cost structure does improve in the coming years, then LYFT stock is dramatically undervalued today.
My long-term model on Lyft assumes a few things:
- The North American ride-sharing market grows ridership by more than 5% per year into 2030.
- Lyft marginally expands share in that market, driven by driver-friendly marketing which will help attract more drivers, decrease wait times, and attract more riders (which in turn attracts more drivers).
- Lyft’s revenues rise at a 15% compounded annual growth rate into 2030, supported by increasing ridership, more rides per rider, and higher average revenue per ride.
- Gross margins scale towards 60%, boosted by decreased promotional activity.
- The opex rate normalizes lower towards 45%, boosted by management’s focus on cost-cutting and streamlining the expense base.
- Lyft’s earnings per share rise towards $5 by 2030.
Based on those assumptions, then LYFT stock could be worth $100 by the end of the decade (using a medium-term technology sector-average 20-times forward earnings multiple).
Bottom Line on LYFT Stock
Lyft stock increasingly looks like a case of near-term pain and long-term gain. If you can weather the storm over the next few months, dip buyers here should be handsomely rewarded over the next few years.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.