Lyft (Lyft Stock Quote, Chart, News NASDAQ:LYFT) has had a rough go of it since its IPO in March with the stock now down more than 45 per cent, but don’t expect the market to start warming up to the ride hailing service anytime soon, argues Gavin Graham of the Income Investor Newsletter.
Graham says investors are increasingly growing wary of companies that promise tonnes of growth but can’t seem to make any money.
Call it the Amazon path. The e-commerce giant is famous for having prioritized growth over profitability, preferring to scale up its services and extend its reach over recording quarterly profits.
Amazon’s model gained believers as it wasn’t until 2016 that the company started to firmly and consistently be in the black, meanwhile, Amazon has fashioned itself into an utterly dominant force in online sales, advertising and cloud computing.
But the belief that profit will eventually come down the road as long as you keep gaining market share hasn’t convinced everybody.
“This is profitless prosperity,” says Gavin Graham, president of Graham Investment Strategy, who spoke to BNN Bloomberg Friday.
“It’s Tesla, Uber, Lyft and the late unlamented WeWork which pulled its IPO,” he said.
“You can get an enormous amount of money from investors like SoftBank or whatever, regardless of never making any money —and frankly, never having any possibility of making any money— but to say that we’ll make it up on volume. Lyft lost $300 million on $900 million in revenues in the quarter before it became public.”
“It and Uber are wonderful services but the reason they’re so good is that it’s good value and it’s good value because they don’t make any money on selling you stuff and on pricing rides, and until such time as they do, it’s not a real long-term business,” Graham says.
Lyft delivered its latest earnings in early August, where it posted consensus beats on both top and bottom lines. Lyft reported $867 million in revenue, better than the $809 million expected by analysts, while its adjusted EPS was a loss of $0.68 per share compared to the Street’s projected loss of $1.74 per share. (All figures in US dollars.)
More impressive was the guidance from Lyft management which increased its revenue projection for the year to between $3.47 billion and $3.5 billion, up from $3.275 billion to $3.3 billion.
“We remain focused on reshaping transportation and we are pleased with the continued improvement in market conditions,” said a statement from Lyft CEO Logan Green. “This environment along with our execution is translating to strong revenue growth and sales and marketing efficiencies. As a result of this positive momentum, we anticipate 2019 losses to be better than previously expected and we are pleased to have updated our outlook.”
Lyft also seems to be doing a good job at convincing Wall Street that the company is building a solid footing. The average 12-month target price on LYFT is at about $60 per share, which would represent a return of 45 per cent.
Last week, Well Fargo launched coverage of the stock with a $60 target, theorizing that Uber is likely to keep taking market share in the United States away from Uber as the latter continues its expansion worldwide.
Graham is skeptical, however, arguing that giving companies the benefit of the doubt when it comes to profitability is a trend that should be winding down.
“These incredibly low interest rates that we’ve had over the last decade have led to massive mispricings of capital and you end up with unicorns — how many companies are worth more than a billion dollars?
Almost none of them will have the ability to make a serious profit,” says Graham.
“With an IPO, the people selling it know a lot more about it than you do. They’re saying, ‘Wow, we better get these things out the door,’ because eventually the game will be up when people figure out that they aren’t going to be making any money,” he said.