Lyft's (LYFT -2.30%) stock price has been decimated -- down 50% since its February high of $54 per share to just $26 per share. Demand for Lyft's popular ride hailing service is almost certainly down enormously right now. But Lyft is going to survive this period and recover. Here's why.
Plenty of cash
Lyft had its initial public offering (IPO) in March of last year when it sold shares to the public at a whopping $72 per share. That raised $2.5 billion of cash for the company and is the major reason why it now has almost $2.9 billion of cash on the balance sheet today. In addition, Lyft has no debt. That's a very strong financial position.
The company is clearly seeing demand for its ride hailing service plummet as a result of coronavirus outbreak, but that $2.9 billion cash cushion gives the company a substantial amount of flexibility to absorb the cash burn it is seeing right now.
First, let's outline the difference between fixed costs and variable costs. Fixed costs are costs that do not increase as revenues increase, while variable costs do fluctuate along with sales. For a simple retail store, a fixed cost would be the cost of the store -- the lease, taxes, insurance, and utilities. Those costs are occurring regardless of how much product the store sells.
Typically, the primary variable cost is the cost of goods sold. The more the store sells, the higher the cost of the products sold. And importantly, the less the store sells, the lower these costs are as well.
With that primer out of the way, Lyft's cost of revenue appears mostly variable. The company's annual report describes cost of revenue in the following way:
Cost of revenue primarily consists of insurance costs that are generally required under TNC and city regulations for ridesharing and bike and scooter rentals, respectively, payment processing charges, including merchant fees, chargebacks and failed charges, hosting and platform-related technology costs, certain direct costs related to bikes and scooters and car rental programs for Lyft Rentals and Flexdrive, personnel-related compensation costs and amortization of technology-related intangible assets.
The majority of these costs are variable costs that will fall as revenue falls. For example, in the ride hailing business, insurance is a per mile cost. If miles driven fall, the cost of insurance falls. And payment processing charges are credit card fees that rise and fall with revenue.
On March 19, Uber Technologies hosted a conference call with the investment community. While Uber and Lyft are not identical businesses, their core ride hailing businesses are very similar. On that call, Uber's management said, "Two-thirds of our cost of revenue and operating expenses, excluding stock-based comp, is variable. Put simply, if a trip doesn't happen, many of these costs go away." That's critical because if revenue falls and costs don't fall, profits turn into huge losses pretty quickly. On the other hand, if revenue falls and many costs fall too, that outcome can be mitigated to some extent.
Elective investment spending
Lyft reports its business results in one consolidated segment, but in reality there are a few different businesses. It would be reasonable to think of Lyft as three buckets -- the core ride hailing business, its investments in bikes and scooters, and its research and development (R&D) spending involving autonomous car technology.
Bikes and scooters can be profitable long-term, but that business is still losing some amount of money today. As for the autonomous R&D, the company spent over $500 million last year, excluding a one-time unusual accounting charge for stock-based compensation related to the IPO. So in a pinch, Lyft could temporarily shut down its investments in bikes, scooters, and autonomous R&D and save well over $500 million per year. That would help offset temporary losses in the ride hailing business while its customers are staying home.
In summary, Lyft has almost $2.9 billion of cash, a large amount of costs that disappear when revenues disappear, and significant investment spending that could be put on pause. The company will certainly lose money while so many people are housebound, but it clearly has the balance sheet and flexible cost structure to survive this period.