Riding With Lyft (NASDAQ:LYFT) | Seeking Alpha

I recently wrote about Uber Technologies, Inc. (UBER), and decided to follow that analysis up with a review of their smaller competitor, Lyft, Inc. (NASDAQ:LYFT) to see if those shares represent better value. I’m going to look at the most recent financials and use history as a guide to work out whether the assumptions currently embedded in the stock price are reasonable or not. If the assumptions are reasonable, and if the financials show some promise, I’ll buy.

One of the first thoughts that I have in the morning is, “how can I make the lives of my thousands of readers more pleasant today?” One of the ways I do this is by offering up a “thesis statement” in each of my articles. This so-called “thesis statement” allows you to get the gist of my reasoning before getting into the meat of the article properly. It allows you to get in, understand where my head is at, and then get out before you’re exposed to too much “Doyle mojo” or proper spelling. You’re welcome. I’m going to take a flyer on Lyft today for a few reasons. First, I think the balance sheet is one of the strongest I’ve seen, and remains much stronger than its larger rival. Second, the assumptions embedded in the stock price are far less outlandish than those embedded in Uber’s. Third, the market price for this stock is, by some measure, nearly 70% cheaper than it is for Uber, in spite of the fact that each of these companies shares similar growth potential. While I would not recommend putting “serious” money into this stock, I think the combination of a strong balance sheet, improving financial performance, and a soft stock price make it relatively compelling.

Financial Snapshot

To put the following in context, we should remember that Uber finally broke into profitability, and is now sporting a 1.3% profit margin. The market seems to assume that’s a spectacular result, given the valuation given to the leviathan. Like Uber, I’d characterise Lyft’s recent financial performance as being “less bad”, with net loss shrinking for the first six months of the year by $272 million, or 47.4%. Additionally, the interest expense has been reduced by a whopping $21 million relative to the same period a year ago.

The most intriguing thing about Lyft’s financials in my view is the fact that the balance sheet is among the strongest I’ve seen. Specifically, cash and short-term investments of $1.698 billion represent about 210% of $808 million in long-term debt. Admittedly, the firm was even more well-capitalized in 2020, where cash and short-term investments represented about 350% of long-term debt, but the fact remains: This is a well-capitalized business. I like this for the very obvious reason that the large cash hoard allows Lyft to fund losses for longer. As the company’s financial performance improves, I can see a future where the company no longer needs to burn through its cash balance. To put this cash hoard in context, Uber has cash of $5.5 billion and $9.26 billion in long-term debt. For those with no ready access to financial calculators, cash represents about 60% of long-term debt, considerably inferior to Lyft’s.

History As A Guide

Financial history may be interesting to some, but investors are much more interested in the future for obvious reasons. We can use history as a guide, though, to work out whether or not the market’s current assumptions are reasonable, based upon what’s happened in the past. Given the economic history, are the assumptions embedded in Lyft’s current stock price reasonable, too pessimistic, or too optimistic, based on the growth path of similarly sized companies in the past? Being able to answer this question would be helpful because if the market is currently too optimistic, that’s a sign that the shares are likely overpriced.

I’m going to start my analysis by assuming that the second half of the year will resemble the first and that Lyft’s revenue will come in at about $4 billion. It seems that the analyst community is forecasting Lyft to grow revenue over the next nine years at a rate of about 8.24%. The question, then, is whether or not this is a reasonable forecast. One way that I like to address whether or not this is reasonable is by looking at history, and asking the question “what percentage of companies, starting at Lyft’s current size, were able to grow revenues at a CAGR of about 8.24% over the next nine years?” Thankfully, some years ago, Michael Mauboussin, and the good people at Credit Suisse answered this exact question. They did this by reviewing financial history between the years 1950 and 2015, and compiled their results in this document.

So, if you turn to page 25 of the document, you’ll find the “Sales $3,000-$4,500 million,” which is where Lyft finds itself today. If you then go down the first column of sales growth to the row marked 5-10, that’s relevant to Lyft’s forecast, because 8.24% implied growth is between 5-10. You then go across to see what percentage of companies starting with Lyft’s base revenue managed to grow revenue at a CAGR between 5%-10% over the next decade. The answer is fully 28% or 1,073 companies of the 3,822 companies in the sample that both started the decade with sales of between $3-$4.5 billion and survived the decade.

To put this in context, only 5.8% of the companies of Uber’s current size grew their revenues at the assumptions embedded in that stock’s current price. It seems that it’s easier to grow revenue from a smaller base. Additionally, I like the fact that this implied growth rate is about two-thirds that of their larger rival, Uber.

The Stock

If you’re one of my regular victims, you know that I consider “the stock” to be a distinct thing from “the business” because the two are actually very different things. The business is a peer-to-peer market for on-demand ridesharing in the United States, and Canada. The stock, on the other hand, is a piece of virtual paper that gets traded around, and it moves up and down in price based on the ever-changing moods of an often capricious market for stocks. Those moves may be the result of things happening at the business, but the stock can move up and down based on changes in short-term interest rates, and changes in the appetite for “stocks” as an asset class.

If you’re of the view that “we don’t buy stocks, we buy businesses”, I feel the need to disabuse you of that notion. Please consider two theoretical investors, the first of whom bought Lyft stock on September 1, and the second who bought a week later on September 8. The first of these is down 11.5% so far, while the latter is actually up about 1.9%. It goes without saying that not enough happened at the firm over these seven days to account for a 13.4% variance in returns. The sad reality is that much of this comes down to luck, but we should also note that the investors who bought shares cheaper did better. This is why I like buying stocks only when they’re sufficiently cheap.

If you’re a regular, you know that I measure the cheapness of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I look at ratios of price to some measure of economic value, and I like to see a stock trading at a discount to both the overall market and its own history. Given that, I think Lyft is trading at a reasonable valuation in terms of what the market is willing to pay for $1 of sales, per the following:

Additionally, the shares are trading at a nice 65% discount to their larger rival on a price to sales basis.

Given the above, I am going to take a small, speculative position in Lyft. I think the company has the cash resources to survive another few years at least, and if sales continue to grow, that may be enough time to pivot to profitability. Please note, though, that this is a speculative position, and it’ll be a small stake for me. I may lose this capital, and I would recommend that anyone who follows my lead here only do so with capital that they can afford to either lose outright or have tied up for a considerably long period of time.