On the surface, Lyft (NASDAQ:LYFT) has been burning cash and reporting accelerating losses for the past three years. That has scared many investors away, and the stock is down over 60% from its IPO price of $72 per share. But there's far more to this story that becomes apparent when you look under the hood.

Expenses overstated

From 2017 to 2019, Lyft's net loss ballooned from $688 million to $2.6 billion. That looks like a terrifying trend, but the company's 2019 results included a one-time $1.6 billion stock-based compensation charge related to the company's IPO. That was an accounting recognition of stock awards that had previously been given to employees, not an ongoing level of stock-based compensation. Normalizing Lyft's 2019 financials for this extraordinary expense means Lyft would have lost closer to $1.0 billion last year instead of $2.6 billion. 

A young woman smiling while hailing down a ride.

Image source: Getty Images.

That shows meaningful margin improvement. Lyft's net profit margin was negative 64% in 2017, negative 42% in 2018, and negative 28% in 2019 (excluding the stock-based compensation). That trend reveals a business that is approaching break even, and the company's own adjusted net loss and adjusted EBITDA figures paint a similar picture.

Free cash flow is also moving in the right direction. In the last three years, this figure has improved from negative $496 million to negative $284 million.

Big non-core investment spending not disclosed 

A major part of Lyft's lack of profitability is its investments in bikes, scooters, and autonomous vehicle technology. The company reports its business results as one segment, so investors cannot break down the exact figures. But these initiatives are clearly losing lots of money, as evidenced by this quote from CFO Brian Roberts on the company's third-quarter 2019 earnings call:

As we said before, we are funding significant investments to drive long-term growth. While the strength of ridesharing is allowing us to accelerate our path to profitability, we are committed to making smart investments in newer initiatives that will drive growth and create long-term shareholder value.

The company's 2019 annual report indicates the company spent $214 million on bikes and scooters between the cost of revenue and operations and support expenses, not to mention a big capital investment in scooters. Bike and scooter revenue appears to be a fraction of that. For one thing, Lyft acquired Motivate, the country's largest bike-sharing company that was behind 80% of the country's bike-share trips, for over $250 million in 2018. Yet Lyft's 2019 annual report stated that the company's revenue from Motivate was not material.

And company executives have also made it clear scooters are in the red too. Last September, Roberts said the following at an investment conference:

I would say if there's a company out there telling you they're making money in scooters, they are lying to you. Scooters right now are tough. And it's really -- again, it's not a revenue issue. It's an operating cost issue.

As for autonomous vehicle technology, the company doesn't explicitly disclose how much it's investing in this area, but autonomous vehicles are the only category specifically mentioned in the company's description of research and development spending in its annual report. Excluding stock-based compensation from last year's R&D, the underlying expense was approximately $534 million. 

So between $534 million of autonomous vehicle-related R&D spending and the heavy investments in bikes and scooters, Lyft's non-ride-hailing initiatives are a huge drag on profitability and free cash flow. All of that spending is reflected in the company's $284 million of cash burn last year, meaning the core ride-hailing business was likely free-cash-flow positive. Most investors don't seem to appreciate that, which makes Lyft shares trade more cheaply than they would otherwise.

COVID-19 impact

Clearly, the COVID-19 outbreak is throwing a huge wrench in the company's path to profitability. The Information has reported that ride-hailing revenue is down over 50%. But Lyft is almost certainly going to survive this as it had almost $2.9 billion of cash at the end of 2019 and a highly variable cost structure. That means many of its major costs should fall along with revenue, mitigating the total losses.

As of this writing, shares of Lyft are trading at just half their year-to-date high mark. If investors expect the company's various investments to pay off over time, and for the widespread lockdowns to be temporary, now would be an opportunistic time to buy the stock