Lyft (LYFT 0.28%) has some big news.
The ridesharing company is on its way to profitability, and it's going to get there faster than analysts thought. That bold claim from Lyft co-founder and CEO Logan Green at the WSJ Tech conference sent Lyft shares higher earlier this week.
Noting, "We've never laid out our path to profitability and we know that's a question on a lot of investors' minds," Green said his company would be profitable on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2021, a year before analysts had been expecting.
The statement was noteworthy for number of reasons but in part because it lacked the usual ambiguity that corporate leaders tend to use when talking about distant financial figures. The Lyft chief did not say, for instance, that profitability by 2021 was a goal or a target but that he wanted to "go on record" and say that the company was "going to be profitable" by the fourth quarter of 2021.
The long and winding road
The prediction should bode well for the company's third-quarter report, which is due out on Oct. 30. The ride-hailing operator has already given investors reason to be optimistic, as the company has topped estimates in both its quarterly reports since its IPO, and it significantly raised its full-year guidance in its second-quarter report on both revenue and adjusted EBITDA. It called for full-year revenue of $3.47 to $3.5 billion, up from $3.275 to $3.3 billion, and adjusted EBITDA of -$850 million to -$875 million, compared to a prior range of -$1.15 billion to -$1.175 billion. Management also said its adjusted EBITDA loss this year would be less than it was last year, evidence the company is making positive steps toward profitability.
Lyft warned several times in its prospectus ahead of its IPO that the company couldn't guarantee profitability, saying achieving and maintaining profits would depend on a number of factors including regulation, supply of drivers, technology, and competition.
However, something has changed over the last six months. In its August earnings call, management sounded optimistic about the path to profitability. Both Lyft and rival Uber (UBER -0.33%), whose shares also jumped on Lyft's earnings forecast, have alluded to an easing of the price war between the two companies, and Lyft touted a number of ways in which it's gaining operating leverage, including growth in both active riders and revenue per active rider, higher prices in the form of fewer coupons and incentives, and a focus on profitable growth.
What it means
The profitability forecast from the founders comes at a time when investors are increasingly demanding that high-growth companies like Lyft show a path to profits. In the wake of The We Company's meltdown, companies like Lyft aren't getting the benefit of the doubt to endlessly burn cash that they enjoyed before.
But there's another reason Lyft's management might want to make such a bold profitability forecast. Morale at the company is likely low, as Lyft shares have lost nearly half of their value since their March IPO at $72. Lyft employees are incentivized through company stock, and Lyft has already paid out more than $1 billion in stock-based compensation this year, in part from its big IPO. Putting a date on the company's break-even point should help motivate employees frustrated with the lower stock price and should help put a bottom on the stock -- as long as the company executes on that forecast.
Similarly, the forecast counters the investor skepticism that has mounted since the WeWork collapse and gives shareholders a new reason to believe in the stock's long-term prospects.
It's important to note that adjusted EBITDA, which ignores stock-based compensation among other things, is much different for a profit on a generally accepted accounting principles (GAAP) basis, but it's nonetheless a big step in the right direction for a company that has been burning cash throughout its history.
We'll learn more next week when the company reports third-quarter earnings, but investors should expect another strong round of results and a boost in guidance, given management's bullish projection. If Lyft is going to erase a near $1 billion adjusted EBITDA loss in just two years, it needs to start doing so as soon as possible.