Ride-hailing giant Lyft (NASDAQ:LYFT) has seen its stock price tank over the past few months as the novel coronavirus pandemic has kept consumers across the globe cooped up in their homes, and killed the travel and mobility markets.
That said, LYFT stock has fallen more than 40% from its February highs.
At this juncture, the investment thesis on LYFT stock rests of three questions. One, will Lyft survive this crisis? Two, what will business look like on the other side? Three, is LYFT stock undervalued here?
In short, here are my answers:
- Lyft has a strong enough balance sheet with sufficient liquidity to survive the coronavirus crisis over the next few months.
- Ride-hailing demand trends will recover in the second-half of 2020, and fully normalize by 2021.
- Around $30, LYFT stock is attractively undervalued.
All in all then, I think near-term weakness in LYFT stock is a long-term opportunity. That said, here’s a deeper look at why.
Although Uber (NYSE:UBER) has the best balance sheet in the ride-hailing game, Lyft’s balance sheet isn’t anything to laugh at. The company has $360 million in cash and $2.5 billion in short-term investments, for a total near-cash balance of over $2.8 billion. There’s another $1.5 billion on the balance sheet in restricted cash and investments.
That gives Lyft more than enough liquidity to weather several months of significantly depressed revenue.
Total expenses measured $4.61 billion last year (excluding depreciation, amortization, and stock-based compensation — all of which are non-cash charges). That equates to about $380,000 per month. Lyft has enough near-cash to absorb more than seven months of full expenses and no revenues.
Of course, that won’t happen. This pandemic won’t drag on for seven months, and during those seven months, Lyft won’t run at full expense power. Many of the company’s expenses are variable, tied to ride volume and will come down as ride volume dries up.
Collectively, Lyft appears to have enough resources on hand to last itself more than a year on a slimmed up expenses base without any revenues. Ultimately, that means this company will survive this crisis.
Demand Will Normalize
There is ample fear out there that consumers will never again use ride-hailing services like Lyft, even after this pandemic passes.
Those fears are silly.
Recent research out of Stanford indicates that far more people have the novel coronavirus than what is being reported, and that the true mortality rate of the virus is somewhere between 0.12% and 0.20% — or in the ballpark of the flu’s mortality rate. Meanwhile, leaked trial data from the University of Chicago Medicine implies strongly that Gilead‘s (NYSE:GILD) anti-viral treatment, remdesivir, works wonders in treating severe coronavirus patients. And, above all else, a vaccine is likely by late 2020 or early 2021.
In other words, in the back-half of 2020, the public perception of this virus will change from “something that is going to end the world and kill us all”, to “a manageable, not-that-deadly, flu-like virus with a strong treatment.” And in 2021, the public perception will further shift towards “a flu-like virus with a vaccine”.
Accordingly, consumer behavior will adjust as public perception changes. In the back-half of 2020, consumer behavior will gradually recover (i.e. consumers will gradually start ride-hailing again). By 2021, consumer behavior will be fully normal (i.e. consumer ride-hailing frequency will be just as robust as early 2020).
For Lyft then, it will be back to business as usual within twelve months.
Relative to the company’s long-term profit growth potential, LYFT stock is attractively undervalued at its $30 price tag today.
According to my numbers, Lyft owns somewhere around 26% of the U.S. and Canada ride-hailing market. That share is up from 13% in 2016, in a market that has grown ridership by more than 70% over that same stretch.
That said, both of those things will persist. The North American ride-hailing market will continue to grow after 2020, thanks to increasing demand for on-demand, convenient transportation. In turn, Lyft will continue to gain share in that market.
Concurrently, Lyft’s margins will improve with scale, reduced promotional activity and a leaner business investment profile.
Big picture: Lyft projects as a sustained 20%-plus revenue grower for a lot longer, with room for significant margin expansion and sizable profit production at scale.
Assuming so, my model pegs Lyft’s 2030 earnings per share at $6. And based on a 16-times forward exit multiple and a 10% annual discount rate, that implies a 2020 price target for LYFT stock of over $40.
Bottom Line on LYFT Stock
LYFT stock has been stung hard by the coronavirus pandemic. And rightly so. The company’s ride-hailing business is all but dead today.
Still, though, this pandemic is ephemeral. So is consumer aversion to ride-hailing. Therefore, over the next twelve months, Lyft’s demand trends will gradually recover and fully normalize. And as they do, LYFT stock will rebound back above $40.
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 rated one of the world’s top stock pickers 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 was long UBER.
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