LYFT's (NASDAQ:LYFT) struggles since going public in 2019 have been well-documented, as the company is one of the worst performing IPOs this year. But there are indications that the company is in shape to turn itself around. In its 3Q earnings report released last October, Lyft beat expectations in revenue and earnings per share. Furthermore, Lyft CEO Logan Green made a statement that he expects Lyft to become profitable by the 2021 4Q. It was a rare authoritative prediction without any hedging about how Green merely hoped for Lyft to be profitable by that date.
But while Green wishes to spin a positive narrative about Lyft’s future, investors should remain uncertain. Here are a few reasons for why continued skepticism remains the best course of action.
Changing Trends
The narrative which Mr. Green wishes to sell is simple and makes sense at first glance. Despite increased skepticism about ridesharing, Lyft (NASDAQ:LYFT) has continued to grow rapidly. In its last 10-Q report, it reported a revenue growth rate of 63% in the 2019 3Q compared to the previous year. What is even more impressive is that Lyft has maintained this high growth rate despite slashing sales and marketing expenses by 32% over the same time period. But the fact remains that despite this high growth rate, Lyft reported a net loss of $463.4 million, up from $249.1 million in the 2018 3Q. And while marketing expenses declined, Lyft’s research costs nearly quadrupled and administrative costs more than doubled. If these expenses continue to rise, it is going to be difficult for Lyft to grow its way out of its present losses. Could not Lyft just dial back on said expenses like it has with marketing? Not really. Lyft’s bet over the long term is that it can help develop autonomous vehicles and thus have a ridesharing fleet that collects fares and does not have to pay drivers. But Lyft admits in its 10-Q that there is no guarantee that its research “will result in the development of market-viable technologies or commercial success in a timely manner or at all.” A realistic assessment is that Lyft nor any other company will have a fleet for at least a few years, making it a very long-term project with a significant chance for failure. Over the short term, there are other factors which will continue to pressure Lyft. The gig economy is under attack, as government officials and Lyft workers call for better wages or for workers to be treated as employers instead of independent contractors. Uber Technologies (NYSE:UBER) remains a threat as a larger competitor spread out in more sectors. All of these factors means that skepticism remains about whether ridesharing remains viable over the long term.
Not the Right Stock
Investors always want to invest in a stock when it is towards its lowest or find other short term investments. Lyft wants to argue that it has hit the bottom and is on its way towards rising as it finally becomes profitable by 2021. But the downward pressures which have made this such a poor IPO remain, and bold predictions are not as good as actual results. If Lyft’s losses can at least grow slower than its revenue or if it can avoid regulation by keeping certain politicians out of power in California and D.C., then investors should feel more optimistic about this company’s future. For now, it remains better to wait and see if the share falls further.