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Aditya Raghunath

Does Lyft's CEO Know Something Analysts Don't?

“Buying the dip” is a strategy where investors purchase shares of heavily sold companies at or near their lows, with hopes of benefiting from outsized gains when markets recover. Of course, what counts as a “dip” is all relative in today's fast-paced markets. 

For instance, shares of ride-hailing platform Lyft (LYFT) are trading no less than 40% below April's 52-week highs, and are nearly flat on a year-to-date basis. But based on recent insider buying activity, the beaten-down shares are looking very attractive to some high-profile investors at current levels.

According to an SEC filing, Lyft CEO David Risher purchased 100,000 LYFT shares worth $1.15 million earlier this month, with an average purchase price of just $11.46 per share. In a statement, Risher emphasized, “This is all about investing in Lyft as we build a very successful, very customer-obsessed business. Seeing this team in action shows me it’s the best investment I could make.” Risher joined Lyft as its CEO this April.

Simultaneously, Lyft board member Dave Stephenson - also the chief financial officer of Airbnb (ABNB) - purchased 8,826 Lyft shares worth $100,000. But while these company execs are buying LYFT on the dip, analysts remain notably lukewarm on the stock's prospects. Let’s see if it makes sense for retail investors to scoop up LYFT stock at its current multiple.

Lyft Operates in a Low-Margin Segment

As one of the two major ride-hailing players in the U.S. and Canada, alongside Uber (UBER), Lyft operates multimodal transportation networks that offer customers on-demand access to multiple mobility options. That includes solutions such as the Ridesharing Marketplace, which connects drivers with riders, and Express Drive, which is a flexible car rental program for drivers. Additionally, Lyft Rentals provides vehicles for long-distance trips, and a network of shared bikes and scooters exists in various cities to address the short-trip requirements of riders. 

Lyft went public in early 2019 at an IPO price of $72, and soared to over $87 per share in intraday trading on its debut. The stock is currently trading around $10.90 at the time of writing, valuing the company at $4.29 billion by market cap. 

The company ended Q2 of 2023 with sales up 3% year-over-year to $1.02 billion, driven by commuter and early morning trips, which grew 20%. Lyft also had the highest volume of quarterly airport rides since 2019, as travel demand continues to rise in a post-pandemic world. 

The number of riders on the Lyft platform was up 8% at 21.5 million due to solid rideshare demand, while the average number of rides taken by each active rider, also called frequency, reached the highest level in over two years. 

But the company’s focus on competitive pricing meant revenue per active rider fell compared to the year-ago period, down 5% to $47.51 in the June quarter.

Lyft operates in a low-margin industry, and has reported cumulative operating losses of a whopping $6 billion in the last four years. But the company ended Q2 with a contribution margin of 42%, or $426 million - up 35% year over year. The contribution margin is defined as the amount of profits left after accounting for fixed costs. 

Due to the rapid expansion of its contribution margin, Lyft reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $41 million, indicating a margin of 4%. The company also exceeded its EBITDA guidance of between $20 million and $30 million.

When Will Lyft Deliver Consistent Profits?

Like several other companies, Lyft wants to improve its unit economics and boost the bottom line. The company hired Risher, an Amazon (AMZN) veteran, as CEO to help stage a turnaround - including a 26% workforce reduction intended to save around $330 million in annual expenses. 

Lyft is also focused on lowering share-based compensation from $750 million in 2022 to $350 million by 2024, which should help move the needle in terms of profitability. However, Lyft’s operating expenses accounted for 31% of sales in Q2 of 2023, while research and development expenses comprised 15% of sales. 

Lyft continues to battle with Uber to gain market share while delivering value to customers. Uber, in fact, reported a surprise operating profit in Q2, while Lyft maintained it will double down on competitive pricing efforts in the near term.

What's the Target Price for LYFT?

Analysts tracking Lyft expect the company to increase sales by 6.3% to $4.35 billion in 2023, and 11.6% to $4.86 billion in 2024. But its loss per share is forecast to widen to $1.31 in 2023 from $0.83 in 2022.

Out of the 27 analysts tracking LYFT stock, three recommend a “strong buy,” 1 recommends a “moderate buy,” 22 recommend a “hold,” and one recommends a “moderate sell.” Wall Street has a 12-month average price target of $13.12 for Lyft stock, which is 20% above current levels.

Lyft stock is priced at less than 1x forward (2024) sales, which is not too expensive for a company growing at a reasonable pace. But it needs to shore up profit margins to improve shareholder optimism.

While the recent insider buy from Lyft's CEO is certainly a nice vote of confidence from the new boss - especially after some tough belt-tightening moves this year - it's worth pointing out that the shares have already dropped about 5% since Risher's big share purchase earlier this month. For now, investors may want to hold off on following Lyft company execs into the stock, at least until the share price shows more convincing evidence of finding bottom.

On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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