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3 Reasons Why Lyft Stock May Continue to Struggle

By Will Healy – Feb 20, 2020 at 10:32AM

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Lyft stock sold off after it failed to match Uber's profit guidance.

In its fourth-quarter report, Lyft (LYFT -2.30%) came in ahead of revenue and earnings estimates. The company brought in revenue of $1.02 billion. This represents a 52.4% increase from the same quarter last year when the company logged revenues of $669.57 million. It also beat consensus estimates by $35.75 million. This gave the company a net loss of $356 million, well above the $248.9 million loss for the same quarter last year. Lyft also increased the number of active riders to 22.9 million, up from last year's 17.9 million.  

Many had hoped for a stellar earnings report and bump in Lyft stock similar to its principal competitor, Uber (UBER 0.30%). Uber moved higher following earnings as it reported that it expected to earn a quarterly profit by the end of fiscal 2021. Unfortunately for Lyft investors, the stock sold off following the Tuesday afternoon report. The selling also continued in subsequent trading days. 

Tech stocks in the rideshare industry have generally struggled. Lyft stock reflects that industry trend, but when it comes to the specifics of Lyft, investors need to remember three things

1. Uber is much larger than Lyft

Uber came in slightly ahead of estimates, reporting revenue of $4.069 billion. The company also handily beat earnings estimates, reporting a loss of $0.64 per share, or $1.096 billion. When dividing losses by revenue, Uber comes out ahead on its net loss margin with losses at 26.9% of revenue. Lyft's losses for the quarter amounted to 34.9% of revenues. Although the net loss margin appears to slightly favor Uber, investors have to remember the size differential between the two companies. In the previous quarter, Uber brought in approximately four times as much revenue as Lyft.

Young woman in sunglasses and black leather jacket holding phone in a city as she looks for her ride.

Image source: Getty Images.

This size has helped Uber afford more lines of business. Uber offers ridesharing services outside of the U.S. and Canada. Additionally, the rideshare giant operates in the food delivery space. Lyft does not match these offerings. Time will tell whether Lyft's focus on rideshare in North America or Uber's expansion to other markets and applications will serve investors better.

2. Regulation

Since the beginning of the year, Lyft stock has benefited from reduced fears surrounding California's Assembly Bill 5 (AB5). The law makes it harder to classify workers as independent contractors. This would require Lyft and other "gig economy" companies such as Uber  to offer benefits such as paid time off, sick leave, and unemployment insurance. Signs of optimism related to workarounds and legal challenges had boosted investor optimism.

However, the company also faces regulatory issues outside of California. Cities such as Seattle restrict where drivers can pick up passengers. Phoenix added fees for airport pickups. Each of these limitations discourages passengers from using rideshares and makes the path to profitability more difficult.

3. Operating expenses

Unfortunately for Lyft, operating expenses continue to exceed revenues by a wide margin. For fiscal 2019, the company brought in just under $3.616 billion in revenue. However, the overall operating expenses of $6.318 billion dwarf this figure. Even when removing the cost of revenue, operating costs alone amount to $4.142 billion. Moreover, those operating expenses -- operations and support and general and administrative expenses -- rise right along with revenue and the cost of revenue. This makes turning a profit difficult. Given that differential, Lyft may even struggle to profit once self-driving cars become more prevalent, and the company needs fewer drivers.

Autonomous vehicles could also lead to another significant threat to meeting operating expenses--more competition. GM (GM -3.52%), Alphabet (GOOGL -1.82%) (GOOG -1.98%), and others have plans to enter this business. Even if Lyft can dramatically reduce the number of drivers it needs, this does not guarantee a profit.

Lyft may continue to beat estimates, and it may even someday see a path to profitability like Uber has reported. However, with huge losses, regulations, and competition continuing to threaten the company, Lyft stock lacks a visible path to long-term success.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Lyft, Inc. Stock Quote
Lyft, Inc.
$13.17 (-2.30%) $0.31
Alphabet Inc. Stock Quote
Alphabet Inc.
$95.65 (-1.82%) $-1.77
General Motors Company Stock Quote
General Motors Company
$32.09 (-3.52%) $-1.17
Alphabet Inc. Stock Quote
Alphabet Inc.
$96.15 (-1.98%) $-1.94
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$26.50 (0.30%) $0.08

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