What happened

Shares of Lyft (LYFT 1.14%) are down 30.9% this week, according to S&P Global Market Intelligence. The ride-sharing company posted earnings and revenue in line with analyst expectations but gave out weak guidance for its upcoming quarter. The stock was down as much as 35% since market close last Friday and is now down 60% in the last year.

So what

On May 3, Lyft released its earnings for the first three months of 2022. Revenue grew 44% year over year to $876 million, and adjusted earnings per share (EPS) came in at $0.07. Both numbers beat analyst expectations coming into the report. So why is the stock down so much this week? Two reasons.

A person getting a key to a car.

Image source: Getty Images.

First, Lyft's second quarter was underwhelming. The company is calling for revenue between $950 million and $1 billion next quarter, which was less than the $1.02 billion Wall Street was expecting. On the conference call, executives also talked about continuing driver incentives to get them on the road picking up customers. This combination of weak revenue guidance and the need for incentives is not a good look for the health of the business.

Second, Lyft is still highly unprofitable. It had an operating loss of $200 million just in Q1 and burned $167 million in free cash flow. For a business that is supposed to be thriving with the reopening of the U.S. economy, this is also not a good look. If Lyft is not profitable now, when will it ever be?

Now what

The good news for Lyft is that it has $2.2 billion in cash on its balance sheet. This cash cushion likely gives it a two-year runway to eventually generate positive cash flow, based on its current burn rate. With the stock down to a market cap of $7.8 billion, shares now trade at a price-to-sales ratio (P/S) of 2, or below the market average. 

If you're considering buying the dip on Lyft shares, you need to ask yourself a few questions. First, do you believe Lyft can ever reach positive cash flow? If so, then the stock could be worth something. Second, how much runway for growth is left, and what profit margins will the company achieve at maturity? These will be key to how much the market will value Lyft stock in the future. If there is still plenty of growth left and margins can be a healthy 10% or higher, then the stock will be worth much more than $7.8 billion five or 10 years from now.

But if you're still uncertain about whether Lyft has a viable business model, it is best to stay away from this stock for now, even though shares are down so much this week.