The bull and bear cases on Lyft

In yesterday's e-mail, I looked at the historical financials of ride-hailing service Lyft (LYFT) and concluded that I liked what I saw...

As I said, it's a "a capital-light tech business with a strong No. 2 position in the market, and it is growing nicely and generating healthy [free cash flow ("FCF")]." It's also trading at low multiples of revenues (less than 1 times) and annualized FCF (less than 6 times).

So with the company reporting fourth-quarter earnings after the market close today, let's take a closer look...

Veteran tech executive and investor Stefan Waldhauser on his "High Growth Investing" Substack page made a strong pitch for Lyft last month: Lyft Stock: The Underrated Uber Rival as a 100% Opportunity for Patient Investors. He begins by summarizing the two main pillars of the bear case:

Lyft is often portrayed as a loser in the public perception on at least two levels: first, Lyft is the loser in the battle against the overpowering arch-rival Uber. Second, Lyft, along with Uber, is supposedly a loser in the AI revolution, as ride-hailing companies could potentially be disrupted by robotaxis.

All of these concerns, along with homegrown operational issues, have caused Lyft's stock price to drop more than [80%] since its IPO in 2019. Looking at the price, you might think that Lyft is a company doomed to fail.

But Waldhauser argues that investors are missing the transformation at Lyft under new management:

The pivotal leadership change at Lyft occurred in spring of 2023, when the company's two co-founders and previous top executives, Logan Green (CEO) and John Zimmer (President), stepped down from their leadership roles. David Risher, an experienced technology executive and former Amazon employee, took over as Lyft's CEO in April 2023.

This May 2023 pitch by anonymous ValueInvestorsClub member ThinkAnew nicely captured how good Risher is:

Risher had built Microsoft Access (its first Database product) from scratch and Bill Gates was obviously upset when he left to join a then startup called Amazon. He was SVP of retail and grew Amazon from [$15 million] to [$4 billion] with Bezos and has a page on Amazon that memorializes his contribution. He then launched a non-profit called Worldreader that has reached 21 million people all over the world using Kindles, cell-phones, and tablets. Either he is really that good or the Lyft folks want to use his credentials to pump up the stock.

And as ThinkAnew continued:

Risher is 57 and has been on Lyft's board since July 2021. I believe it's fair to say he knows what he's getting himself into when he accepted this job. I just cannot imagine someone who's been so successful for so long take a low probability bet at this age unless he thinks there's a decent chance of success and that the payoff will be huge. And that's exactly how they structured his payoffs. He stands to make [$1 billion] if the stock really takes off. Obviously, fundamentals will drive stock price over the long run. I (want to) believe Risher knows his odds.

Turning back to Waldhauser, he highlights what Risher has done:

Lyft was finding it increasingly difficult to compete with Uber, especially in terms of market share, profitability, and diversified services (e.g., food delivery). Investors called for a realignment to make the company more efficient and competitive. David Risher decided to strengthen Lyft by focusing on its core ride-hailing expertise, reducing operating costs, improving profitability, and expanding partnerships...

The new management has implemented a restructuring program over the past two years and has already achieved a lot: more than 25% of the workforce has been laid off, and despite these cost-cutting measures, Lyft has remained a true growth company to this day.

As a result, Waldhauser argues:

Lyft now runs a massive platform: 5.5 million active passengers use Lyft weekly, transported by 500,000 weekly active drivers. Two million rides are arranged daily. The total number of customers is approximately 50 million. Gross bookings grew by approximately 17% year-over-year to over $16 billion in 2024. Lyft's revenue from these bookings will be around $6 billion. The free cash flow margin (as a percentage of revenue) is already in double digits, although there could still be a small net loss in 2024 (possibly for the last time).

Meanwhile, one of my longtime readers, Scott W., added his insight to the bull case:

LYFT happens to be my second-biggest equity holding. Look at how effective Risher has been in dramatically expanding Lyft's partnerships, rationalizing its expense structure, and generating the increasing cash flow you mentioned. Plus, as the cherry on top, though not a primary investment thesis, Lyft could easily fit as a megacap's takeover candidate as we near full autonomous driving.

Over the years I have come to appreciate more and more what a difference a transformational CEO can make in a company's fortunes. Take Larry Culp at GE as a prominent current example. That was as much a driving force in my buying LYFT as where its financials were at the time.

Waldhauser also thinks that Lyft is a good takeover candidate:

At least since the management change in early 2023, Lyft has been considered a takeover candidate. Uber as a buyer is certainly out of the question, as even a takeover-friendly Trump administration would prevent such a dominant market position for a single player.

But there are a few other candidates for a strategic acquisition of Lyft... [and he goes on to discuss Amazon, Alphabet/Waymo, Tesla, and traditional car manufacturers (GM, Toyota, VW)].

Here are Waldhauser's projections for 2027:

... It is easy to calculate what a cash flow machine Lyft is likely to become by 2027:

• Gross Bookings are expected to increase to approximately $25 billion.
• [Earnings before interest, taxes, depreciation, and amortization ("EBITDA")] should be $1 billion.
• Free Cash Flow (FCF) should exceed $900 million.

If these estimates are anywhere close to correct, Lyft's stock is likely to do very well.

However, I'm not pounding the table to buy the stock right now...

That's primarily because of reasons my team and I cited when we listed Uber Technologies (UBER) and Lyft as "doomed AI victims" in a special report we sent to Stansberry's Investment Advisory subscribers last August.

Subscribers can read the full report here: Dead Men Walking: 10 Doomed Companies in the Crosshairs of AI. (If you aren't a subscriber, you can find out how to gain access to it, all our other Investment Advisory special reports, and the full portfolio of official recommendations by clicking here.)

In that report, we wrote:

Uber and Lyft have built their businesses around the recruitment and hiring of human drivers to operate vehicles. As AI starts to power AVs, these companies' entire employee base will become unnecessary. That means Uber and Lyft would be left simply as software platforms, which would be easy for another AI-driven company to replicate.

And this isn't just speculation. Already, Waymo is offering AV ride hailing in San Francisco, Los Angeles, Phoenix, and Austin, Texas. Initially, ridership was restricted, and access was via waitlist. But the technology has improved to the point of a full commercial rollout, now offering tens of thousands of weekly trips.

In June, Alphabet announced that the Waymo app became fully unrestricted in San Francisco, making it America's first fully autonomous, fully commercial ride service.

As a result, we noted that "the business implications for the existing ride-hailing companies are dire":

Uber and Lyft are paying drivers, while Waymo doesn't need to. Technology has reduced its costs, which will allow Waymo to reduce costs to take market share. This will eat into Uber and Lyft's margins and threaten their very existence.

Uber knows this... It spent more than $1 billion in a failed attempt to create a rival to Waymo. Now, like Lyft, it's living on borrowed time.

Sure enough, look at how Waymo has been steadily taking market share from both Uber and Lyft in San Francisco (hat tip to reader AK1612 for sending this to me):

However, this is only one city... and it will take time before Waymo really impacts Uber and Lyft. As Waldhauser argues:

Uber and Lyft are wrongly seen as losers in the AI battle. For years to come, hybrid mobility platforms will be needed that offer vehicles with and without drivers, depending on the region. Lyft, along with Uber, is well positioned for this and is significantly undervalued.

Lyft is also investing in self-driving vehicles, as this new TechCrunch article notes: Lyft to launch Mobileye-powered robotaxis 'as soon as 2026,' starting with Dallas.

Considering both sides of the argument, Uber and Lyft still appear to have a nice oligopoly – can you even think of who's No. 3? – and are competing rationally (i.e., avoiding a destructive price war). Weighing the bull case, Lyft's stock could be a decent trade for folks who like to bet on earnings announcements.

But as I said earlier, I'm not pounding the table on buying it. There's a big difference between a stock to avoid and one to buy...

As I've said many times, the beauty of investing is that you don't have to choose a side when it comes to being long or short a stock.

For Lyft, I'm not forced to buy it or sell it short – and the threat of autonomous vehicles worries me – so I would stay on the sidelines.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.