Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
Investors in Lyft (LYFT -3.43%) have had a rough five months. Since going public in March, shares are down 30% from their $72 IPO price. But there's good news, too.
Since that IPO took place, the "quiet period" that prevented underwriters from speaking in support of the stock has expired. Last week, TheFly.com reported that a wave of selling that hit Lyft shares after its post-IPO lock-up period expired has also passed, easing selling pressure.
And today, Lyft got an upgrade from Wall Street. Here's what you need to know.
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Upgrading Lyft
This morning, Guggenheim Capital announced it's upgrading shares of Lyft from neutral to buy and assigning a $60 price target that implies 19% upside. The reason? The intense price war among Lyft and rivals such as Uber (UBER -2.03%) appears to be abating.
As Guggenheim explains, Uber is contending with multiple challenges right now, including competition from food delivery specialists such as Grubhub and Postmates, and the expense of expanding its business internationally -- all at the same time as it competes with Lyft here at home. In order to fund its multifront wars, Uber "needs margin," as TheFly puts it. It cannot afford to engage in a price war with Lyft and at the same time make enough money from its U.S. ride-hailing segment to pay for the losses at its other businesses.
Paraphrased, Uber needs to earn money "here" in order to keep on spending money "there."
Rationality returns to the market
Result: Uber is having to raise its fare prices for ridesharing here, and cut back on discounts and coupons for free trips, in order to husband its cash. Fares are rising at Uber, and this gives Lyft room to raise its own prices as well -- thus working to the benefit of both companies.
Granted, just like Uber, Lyft remains an unprofitable company and sports a share price nearly five times its annual sales. (Or as the analyst deadpans, "Risks remain, to be sure.")
Still, "[w]ith fares rising and incentives falling," Guggenheim argues that these "improving US ride hail competitive dynamics" are "pulling ... forward" the day when Lyft could begin earning profits from its business.
When will Lyft turn profitable?
How far forward can we expect that day to be pulled?
"We now expect LYFT to be EBITDA positive in 2021 (prior 2023) and get to $1.5B by 2023," predicts Guggenheim. In other words, Lyft could turn "profitable" in the sense of enjoying positive earnings before interest, taxes, depreciation, and amortization (EBITDA) two years ahead of schedule.
Granted, Lyft still needs to deduct interest on its debt, taxes on its profits, and depreciation and amortization costs to calculate net profitability (that's the one that goes into calculating a stock's P/E ratio). Even 2021 is probably still too early to expect Lyft to have a P/E.
That being said, because all these numbers are tied together to an extent, pulling EBITDA profitability two years closer should logically imply that other flavors of earnings, such as free cash flow and GAAP net profitability, could also arrive ahead of schedule.
In that regard, according to data from S&P Global Market Intelligence, the consensus among analysts right now is that Lyft's free cash flow will turn positive about the same time as EBITDA gets into the black -- 2023 -- while GAAP net profit will arrive in 2025. Extrapolating from Guggenheim's prediction on EBITDA, therefore, it seems at least possible that Lyft stock could beat those estimates, and begin generating positive free cash flow by 2021 -- and report its first GAAP profit in 2023.
Given that all of this is predicated upon Lyft raising prices on its services -- and Uber doing so, too -- none of this is particularly good news for their customers. It could, however, be very good news for their investors, who now may not have to wait quite so long to be able to hang a reliable P/E on these two ride-hailing stocks.
