Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons Why Lyft Stock Fell 20% Last Week

By Rick Munarriz - Apr 14, 2019 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors are bailing on the country's second largest car-sharing service, and it's not pretty for this broken IPO.

Lyft (LYFT 5.98%) was one of last week's biggest losers. Shares of the country's second most popular car-sharing service plummeted 19.5%, a rough road in just its second full week on the market. 

The week started off on a sour note. Reports surfaced that Lyft is threatening to sue Morgan Stanley, accusing the investment banking giant of marketing short-selling trades to early Lyft investors who are unable to sell their shares due to lock-up restrictions. HSBC then followed later in the week, initiating coverage with a neutral hold rating despite the stock already trading below its $72 initial public offering price. The final dagger came when industry leader Uber filed its latest financials ahead of its own upcoming IPO. 

Four people in a make-believe Lyft vehicle.

Image source: Lyft.

Short people

There has been a lot of shorting of Lyft. When a company hits the market with a valuation north of $20 billion -- at roughly 10 times trailing revenue and having posted a gargantuan deficit of more than $911 million last year -- it's going to be inviting to naysayers. 

No one is going to stop someone from betting against a stock that he or she feels is overvalued, but Lyft's shot at Morgan Stanley is that it's helping its pre-IPO investors circumvent lock-up expirations by allowing them to short the stock now to lock up their earlier gains. Morgan Stanley denies the allegations, but we'll have to see how that plays out. It's just a bad look for a company in just its second week of trading to be pointing the finger at anyone in the underwriting industry. 

Wall Street is lukewarm

We have yet to see Lyft's IPO underwriters check in with their official ratings on the stock, but the recent moves by Wall Street pros with less of a bias haven't been kind. Masha Kahn at HSBC initiated coverage of Lyft with a hold rating and a $60 price target on Wednesday. Kahn feels that pricing needs to drop dramatically for ride-hailing services to take over most transportation needs, and it's a bad sign that Uber and Lyft are losing so much money even at current trip rates.

Kahn is also concerned that distant silver medalists scale at a lower margin that the market leaders, and Lyft is certainly well behind Uber at this point. She feels that Lyft deserves to be priced at a discount to Uber.

Here comes Uber

The final piece of last week's pessimistic news trio was Uber giving investors a closer look at its financials. Uber's S-1 filing on Thursday confirmed just how large it is relative to Lyft. It may be growing slower -- revenue rose 42% in 2018 while Lyft's top line more than doubled -- but Uber is also generating more than five times as much revenue. The company recorded nearly $11.3 billion on its top line. Not surprisingly, Uber also has five times as many users. Did you know that Morgan Stanley is the lead underwriter for Uber's offering?

However, Uber's bottom line is also problematic. The company's operating loss topped $3 billion, and that diminishes hopes that Lyft will turn the corner anytime soon. If Uber's struggling to turn a profit with a more diversified model and greater sales, we may never get to the point where the ride-sharing industry gets out of the red. The deep dive into Uber's business shows that the industry is going to be challenging for even the market leader. Lyft will struggle even if it manages to catch up in Uber's rearview mirror.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lyft, Inc. Stock Quote
Lyft, Inc.
$20.21 (5.98%) $1.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/23/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.