Investors have thrown in the towel on Lyft (LYFT 6.48%), Vail Resorts (MTN 1.03%), and Shake Shack (SHAK 1.86%), due to the very serious headwinds they are facing from the COVID-19 outbreak.
But that's a huge mistake, because these headwinds are temporary. COVID-19 is likely to be with us for some time to one degree or another until an effective vaccine can be manufactured and widely distributed. Nevertheless, these stocks should "climb a wall of worry" as business conditions slowly improve before they soar when investors begin to see a permanent solution on the horizon.
Lyft is the second-largest ride-hailing business in the United States after market-leader Uber Technologies. Its business is reeling right now as ridesharing demand has plummeted due to the huge declines in travel, commuting, entertainment, and other use cases. According to The Information, bookings for Lyft's ride-hailing business were down "over 50%" year over year in late March and deteriorated to down 80% in early April, before improving slightly to down 75% year over year more recently.
But this is temporary, and Lyft has the balance sheet to survive this. At the end of last year, Lyft had about $2.9 billion of cash and investments on hand and no debt. Plus, the company has a highly variable cost structure, meaning that when revenue collapses, most of its costs disappear, too. For example, insurance is Lyft's single largest expense within its cost of revenue line, and it's a per-mile expense. So if miles driven are down big, insurance costs are down big. The same is true of credit card processing fees, which fall with the number of rides being taken on the platform.
In addition, The Information recently reported that Uber is discussing plans to lay off 20% of its workforce, Lyft is expected to further cut costs, and that "some Lyft employees privately say they too are bracing for layoffs this quarter." These potential measures are very unfortunate at a human level, but they will help ensure that the company survives to see the eventual recovery. With Lyft stock down 45% from its February high, patient investors should see strong long-term returns from here.
Vail Resorts is in the same boat. The company operates 17 ski resorts in North America and Australia, including well-known resorts Whistler-Blackcomb in British Columbia and Vail Mountain and Breckenridge in Colorado. All of Vail's North American ski resorts, restaurants, and lodging properties are closed due to COVID-19.
The company has taken extreme measures to cut costs during this period. It has furloughed all of its year-round hourly employees, curtailed capital spending plans, suspended its next two dividend payments, and slashed executive and director pay, including eliminating CEO Rob Katz's salary for six months.
These measures should be enough to allow the company to survive, but if not, further measures could be taken. This is certainly a brutally difficult period for Vail and all of its employees, but again, it will be temporary. At this point, it seems likely that ski mountains will be open this winter, although perhaps with limitations on crowd sizes.
Shares of Vail Resorts are still down by 34% from their February high. Investors are pessimistic about Vail these days, but sentiment toward the stock should improve as the economy begins to open up and skiers eventually return to the mountains.
Shake Shack is another business that's being badly hurt by the COVID-19 shutdowns. Some of its restaurants are closed, while most of them remain open for delivery and pick-up orders.
On April 17, the company reported preliminary first-quarter business results that showed "same-Shack sales" -- the company's version of same-store sales -- fell 12.8% last quarter. That includes as-expected January and February results and a 28.5% decline in March.
But the company has taken aggressive measures to cut costs, such that it is now burning "only" $1.3 million to $1.5 million per week before any potential rent relief it may be able to negotiate with its landlords.
Shake Shack has plenty of cash to survive for a very long time at these depressed business conditions. It had $112 million of cash on hand as of April 16. Since then, it has raised $140 million in an equity offering and $10 million in an "at the market" (ATM) equity offering. That's about $262 million, and it still has the option to raise an additional $65 million under the ATM offering.
Given its cash resources and recent cash burn rate, Shake Shack could survive for more than 200 weeks, or about four years, even if business conditions remained status quo. But that shouldn't be necessary, because its stores will eventually reopen -- likely this year -- returning the company to cash-generating mode.
With Shake Shack stock down 32% from its February high, investors appear to have given up on the company. Just like with Lyft and Vail Resorts, that's going to be a huge mistake.