Whenever I'm looking for a new investment opportunity, one thing that I enjoy doing is looking at 13F filings from hedge funds. These documents break down the stocks that high-profile investors bought and sold during a given quarter.
David Tepper of Appaloosa Management is one investor I like to keep an eye on. Last quarter, he bought 7.5 million shares of ride-hailing app Lyft (LYFT +0.08%), increasing his position by 1,600%.
Let's dig into why Tepper may be intrigued by Lyft stock right now and assess if you should follow his lead for your own portfolio.
NASDAQ: LYFT
Key Data Points
Ride-hailing is a big opportunity
According to data from Statista, the global total addressable market (TAM) for ride-sharing is expected to eclipse $200 billion by 2029. Considering one of the biggest value propositions of ride-hailing platforms such as Uber Technologies and Lyft is the convenience these apps offer, it's not surprising to see such an enormous market opportunity.
Moreover, ride-hailing platforms should continue revolutionizing how consumers travel given the rising interest in autonomous driving solutions. In the long run, self-driving cars should bring another layer of efficiency to the transportation-as-a-service (TaaS) industry and serve as a catalyst for the major players.
Image source: Getty Images.
Why might Tepper like Lyft stock?
The charts below paint a starkly different picture between Lyft and Uber. Uber's revenue and free cash flow are multiples higher than that of Lyft. Furthermore, Uber has been consistently profitable on a generally accepted accounting principles (GAAP) basis for some time now.
One of the ways Uber was able to build such a commanding lead over Lyft was through a series of savvy acquisitions, including alcohol delivery start-up Drizly and food delivery service Postmates. By diversifying its platform beyond the core taxi service, Uber is able to reach consumers on a deeper level by cross-selling its other products.
LYFT Revenue (Quarterly) data by YCharts
Over the last three years, shares of Lyft have cratered by about 75%. Moreover, Lyft's price-to-free-cash-flow (P/FCF) multiple of 13.5 pales in comparison to Uber's P/FCF of 32.9.
The market's premium valuation on Uber is a signal that most investors see the company as the superior player compared to Lyft. With all of that said, I would not balk at Lyft's investment prospects simply because it's a smaller operation compared to its rival.
One of Tepper's core investment traits is that he looks for deep-value opportunities -- stocks that may be forgotten or written off as too risky, and therefore trade at lower-than-usual valuation multiples. I think Lyft fits this criteria.
Should you buy Lyft stock right now?
Keep in mind that consumer spending has taken a beating over the last couple of years due to high levels of inflation and rising interest rates. Lyft's business became vulnerable as people scaled back on travel plans and discretionary activities such as going to a concert or eating out at a restaurant.
However, over the last several months inflation has cooled down. And more recently, the Federal Reserve finally reduced interest rates for the first time in several years.
I see these as positive economic indicators, and ones that could spark some renewed growth for Lyft. In fact, after posting flat results across bookings and rides during the fourth quarter of 2023 and first quarter of 2024, Lyft's most recent earnings report showed a notable uptick across the platform.
As rides and bookings increased both from the first quarter and the same period last year, so did the company's operating margin and profitability profile.
If you're considering investing in Lyft, I'd caution against getting too caught up in whether or not the company can encroach on Uber's territory. In a way, Uber has transformed into a completely different type of company than Lyft. Through its acquisitions, Uber has built an end-to-end convenience-as-a-service offering and perhaps deserves its premium valuation.
Nevertheless, Lyft has finally started seeing a turnaround in demand trends that has sparked notable acceleration across the top and bottom lines. Moreover, I think the company's newfound profitability will allow Lyft to reinvest in the business more efficiently and should not be discounted when assessing its investment prospects.
To me, Lyft stock is almost like a call option on broader economic health. I think Tepper's choice to buy Lyft stock during the second quarter will prove wise in the long run. Investors looking for opportunities in a large, growing market may want to consider a position in Lyft while the stock is still trading at bargain levels.
