There are a lot of fallen angels from the pandemic-era stock market bubble. Ride-sharing platform Lyft (LYFT 1.87%) is a textbook example of a pandemic bubble stock.
Its shares are off 85% from their all-time highs even though the company has put up solid revenue growth as investors clamor for these new-age companies to generate true profitability. Lyft has posted a trailing-12-month net loss every quarter since going public in 2019. Not great.
But there are some signs it might be finally turning a corner. With new management taking the reins and cost-cutting initiatives in place, is there hope Lyft stock can finally make a turnaround? Let's take a look.
Growth is back, but where are the profits?
Operating as part of a duopoly in a growing industry in North America (its only direct competitor is Uber), Lyft has been able to easily grow its ride-hailing revenue over the past few years. This is true even with many West Coast markets still operating at ride-share volumes below pre-pandemic levels, according to Lyft management.
Revenue has grown year over year every quarter since the second quarter of 2020. It was up 14% in the first quarter of this year to a tad over $1 billion. The platform is still much smaller than Uber, with only around 20 million active riders. But it has been able to maintain its market share versus its larger competitor over the last few years, which bodes well for long-term durability and retaining customers.
The problem with Lyft has been profitability. It's not like the core ride-hailing application has terrible unit economics. In fact, over the last 12 months, the company has generated just under $1.7 billion in gross profit, which is revenue minus all the variable costs associated with running the platform.
It has too many employees working on research, administrative, and sales tasks. For example, last quarter alone, Lyft spent almost $200 million on research and development costs. This is not sustainable for a company of this size.
LYFT gross profit (TTM) data by YCharts; TTM = trailing 12 months.
Can new management fix things?
In April, the company announced that it was moving away from its co-founders running the business and brought in Amazon veteran David Risher as CEO to fix these profit issues. So far, Risher and the new executive team seem to be taking the job seriously. Lyft laid off 26% of its workforce this spring and stopped hiring for a bunch of new positions, which will eventually start showing up on the income statement.
Risher has only been around for a few months, so it is still hard to evaluate just how much these cuts will affect the business. But he did say on a recent conference call that the layoffs would save $330 million in annual costs. What's more, Lyft is cleaning up its egregious stock-based compensation policies, with plans to bring its total share-based compensation down to $350 million in 2024 compared to $750 million in 2022.
These cuts should help move the needle, but will they be enough for Lyft to reach profitability? We'll find out over the next few years.
Valuation is hard to pinpoint
There's no doubt Lyft's stock looks cheap if you believe in these cost-cutting measures. The company should start generating $2 billion in gross profit rather soon while its stock only trades at a market capitalization of $4.3 billion. If management really cleans up its operating expenses, it could start generating enough net income to bring its earnings multiple down in the single digits. The stock will likely do quite well over the next few years if this actually occurs.
What keeps me worried, and why I am not buying any shares today, is a concern that this exorbitant spending culture has been ingrained at Lyft. It may be darn near impossible for a new CEO -- even one from Amazon -- to fix these issues without risking permanent damage to the company culture.
What's more, there is the looming risk of self-driving threats from the likes of Alphabet's Waymo and Tesla. These new technologies have the potential to completely disrupt Lyft's business and are something the company might not be prepared to navigate.
Lyft shares look cheap if the company cleans up its operating expenses, but there's too much uncertainty around its business model to warrant buying the stock today.
