San Francisco, CA-based, Lyft, Inc. (NASDAQ: LYFT) was the first of the “unicorn” rideshare companies to IPO on March 29, 2019. Priced at $72-per share, LYFT opened for trading at $87.24 briefly spiking to $88.60 before commencing its ominous descent to $37.07 lows. Despite the S&P 500 making new all-time highs, over 25 analysts buy ratings and improving metrics since its IPO, Lyft shares continue to disappoint investors as Bears argue that Lyft shares still carry another 50% of downside risk to under $20-per share.
What Lyft Leaves Out of Its Earnings Reports
Lyft released its Q2 2019 earnings on Oct. 30, 2019, reporting revenues of $955.60 million beating consensus analyst estimates of $915.15 million, a 63.4% YOY revenue growth rate. Earnings came in at negative $463.5 million or ($1.57) per share beating the ($1.66) estimates by $0.09-per share. While the 63.4% YOY growth appears impressive on the surface, Lyft leaves out critical details to verify actual evidence of market-driven demand versus growth through cost-cutting, notably driver pay cuts.
Lyft Moves the Goal Posts
Investors got a rude awakening with Lyft’s Q1 2019 when they stated they would not disclose gross bookings numbers (total fares collected, and total rides given) or revenue as a percentage of bookings (RPB) also known as the “take-rate” as suggested on page 83 of their S-1 filing. Keep in mind, gross bookings is to transportation companies what same-store sales are to retail department stores. It’s a standard industry metric of top-line growth that even its competitor Uber (NASDAQ: UBER) still discloses with each quarterly earnings release. Lyft calculates their revenue as the portion of the fare they receive minus driver’s wages (including incentives and bonuses).
A 10% Take-Rate Boost for 50% Revenue Growth
Lyft could theoretically have flat YOY gross bookings but still, bolster revenue growth by upping their take-rate through driver wage and bonus pay cuts. Let’s take a simple example, if gross bookings were flat at $100-million year-over-year, Lyft could bolster their revenues by cutting driver pay to proportionately improve their take-rate from 20% to 30%. While their gross bookings show no improvement, Lyft could still juice their revenues from $20 million to $30 million indicating 50% YOY growth.
The Path to Profitability or Mediocrity
There is evidence of driver pay cuts from the switch to Personal-Power-Zones (PPZ) flat-rate “surge” bonuses from the previous Primetime “multiplier-surge”, which means Lyft pockets the bulk of the extra fare premiums riders pay during busy periods. Lyft has also been rolling out drastic mileage pay cuts in various cities. As of Aug. 14, 2019, Raleigh-Durham, North Carolina Lyft drivers are being paid $0.3075-per mile down from $0.57-per mile, a 45% pay cut and well below the Federal standard mileage deduction of $0.58-per mile. While Lyft did increase the time pay from $0.105 to $0.135-per minute, the bulk of a driver’s pay is anchored to mileage. Even worse, Lyft’s Express Drive program locks in rental car drivers to pay rates as low as $0.22-per mile. The bottom line here is that Lyft is burning the candle at both ends by cutting driver pay and raising passenger fares with the assumption of no blowback. Bears argue this “path” can’t sustain itself, especially with more government intervention on the horizon.
The AB5 Contagion
California’s reasoning for AB5 is weighted heavily on recouping up to $2 billion in lost tax revenues stemming from the misclassification of independent contractors. If California implements AB5, this could be a death knell to Lyft more than Uber. Both platforms benefit from saturating the roads with drivers since they only pay when drivers are on trips. They don’t pay for the idling and trawling time that drivers perform (which adds to traffic congestion). If drivers are classified as employees, Lyft would have to pay for driver liquidity (minimum wage, mileage reimbursements and payroll taxes) which analysts anticipate could raise expenses by 30%. It also means driver liquidity becomes a zero-sum game, which further raises costs.
From Unicorn to Taxi Dispatcher
Lyft’s so-called path to profitability is a path to mediocrity. The S&P 500 Transportation Index ETF (NYSEARCA: XTN) has a weighted Price-to-Earnings (P/E) ratio of 13.93 and Price-to-Sales (P/S) ratio of .70. As of Nov. 9, 2019, Lyft’s market capitalization of $12.66 billion on estimated FY 2019 revenues of $3.58 billion revenues equates to a 4X P/S ratio. This over 4X the average P/S. If Lyft does reach profitability by the end of 2021, investors can expect the market will further price shares in accordance with transport industry metrics along the lines of a 13 P/E ratio. As it stands, even at a generous 2X P/S ratio, Lyft should be trading under $20-per share.
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