Uber made a comeback in 2023. The transportation and delivery platform now sports a market capitalization of $165 billion, making it one of the largest businesses in the world. Investors have heaped praise on the company and its new management team.
But it seems like they forgot about the second player in ridesharing: Lyft (LYFT 1.87%). Lyft stock has underperformed since going public as it racked up operating losses. But after bringing in a new CEO from Amazon and trimming its operating expenses, the company has begun to inch its way to profitability.
The stock has reacted in kind, with shares up 32% just so far in 2024, and is now sitting at just above $18. Should you buy Lyft stock now? Let's dive in and see.
Growing revenue: Will the profits show up?
After years of underperformance and no profits, Lyft decided to make a management change in early 2023. It brought in David Risher, a former Amazon executive, in April of last year. At the time of his hiring, Lyft was down around 90% from its initial public offering (IPO) and generated a $1.5 billion operating loss in 2022 on just $4.1 billion in sales. Ugly stuff.
To right the ship, Risher began with the hard task of trimming Lyft's bloated workforce. Management let go of 26% of their workers immediately after Risher came on board, something that was necessary to keep the company afloat.
Investors likely worried this would have an impact on Lyft's ability to grow. I mean, these employees had to be doing something, right? That didn't end up happening. Lyft's key top-line metrics all grew in 2023. Gross spending on the Lyft platform grew every quarter in 2023 and exited Q4 growing 17% year over year. Active riders grew every quarter, leading to revenue of $4.4 billion in 2023.
Profits haven't shown up yet on a full-year basis, with Lyft posting an operating loss of $475 million in 2023. However, it has made tremendous progress every quarter after these layoffs, with net income approaching breakeven in the third and fourth quarters of last year. In 2024, Lyft is guiding for positive free-cash-flow generation, which should help alleviate any concerns investors have about its balance sheet.
Becoming more nimble and innovative
The best part about Lyft's turnaround is that it has done so while lowering its expenses. Compared to 2022, Lyft spent less on overhead, marketing, and research in 2023 while also accounting for huge severance payments.
This is a great sign that the company can still operate with fewer employees. If it can continue growing revenue over the next few years, profits should finally start to arrive.
Risher and the new team have been quite innovative in helping Lyft as it competes with the dominant Uber in ride-sharing. The company has launched a product for women's safety that has gotten wide adoption and is implementing digital advertisements to help drive margins.
It also made commitments to pay its drivers more transparently. It has a goal of paying them at least 70% of the gross spending flowing through the Lyft app. As the second player to Uber, Lyft will need to innovate to maintain its market share, which the new executive team has done so far.
LYFT Revenue (TTM) data by YCharts.
Is the stock a good value below $20?
At $18.25, Lyft has a market cap of $7.3 billion. I think this is an attractive spot to buy Lyft shares, even after its massive run-up to start 2024.
With $4.4 billion in revenue and strong unit economics, Lyft can easily achieve 10%-plus bottom-line profit margins -- perhaps even 15%. It's not operating its vehicle fleet and only takes a cut of every transaction on its platform, which comes with high incremental margins.
At $5 billion in revenue -- a top-line number Lyft should be able to hit within a few years -- a 15% profit margin will equate to $750 million in earnings. That would give the stock a cheap price-to-earnings ratio (P/E) under 10.
To be fair, the company isn't generating these profits today, but it isn't far-fetched to believe it can within two to three years. This makes Lyft an attractive stock at these prices if you believe it can maintain its market share in ride-hailing.
