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The Pepsi (NASDAQ:PEP) of ride-hailing services, Lyft (NASDAQ:LYFT) will be profitable by 2021 claims Guggenheim. After beating its archrival Uber (NYSE:UBER) to IPO in March (Uber opened to the public for subscription in May), investors have been worried about its long term financial prospects, particularly eventual profitability. Guggenheim earlier expected Lyft to turn profitable in 2023, further lending credence to investor worry over its long-run viability. However, in a turn of fate, Guggenheim now expects Lyft to be in the green by 2021 - less than two years out. After the news came out, Lyft stock jumped and finished the day up over 4%.
The upgrade was prompted by a surprising shift in the company's pricing model over the last two quarters, quelling some fears as to the company's ability to slowly crawl its way out to green pastures. In particular, Guggenheim sees Uber's move into more international markets and the need for more liquidity with its food ordering arm Uber Eats as an opportunity to raise prices for Lyft. "Price increases should stimulate take-rate, bolster contribution margin and yield narrowing losses, with the potential for upside to consensus across key metrics" Fuller and Faghri (analysts at Guggenheim) are quoted as saying.
The Proverbial Albatross around the ride-hailing neck
To many observers, these recent proclamations may seem largely hokum and there is plenty to suggest the ride-hailing sector is fundamentally unsound and financially unviable in the long run. Hoping for radical technological breakthroughs (computer vision fuelled fully autonomous driving) to change the whole equation and simply eliminate heads of expenditure ( read: payouts to "independent contractors") is ample proof of it. However, market sentiment seems detached and immune to this most basic calculus. Where traditionally profitability was the mark of a company's success, today it is the larger chess game of market share, consumer mind share and diversifying under the same core brand and technology (for instance Uber's food ordering arm). The fundamental soundness of this strategic shift shall only be revealed by time, but as was said previously, the investors are not looking too unhappy with the situation, at least when it comes to loosening the purse.
Apart from the Level 5 fully autonomous driving hail mary, when Guggenheim first covered Lyft back in April, Fuller and Faghri saw only three pathways to profitability, "cut driver pay, turn off incentives, reduce insurance costs", they are quoted as saying according to MarketWatch. "The first two would be tough in a highly competitive category, the third might not be enough by itself," they said further. What changed over the last two quarters was Lyft's pricing strategy with steadily rising prices in key locations. Lyft's CFO on its second quarter's earnings call commented on the new move "Our guidance incorporates modest price adjustments that went live towards the end of June. More specifically, we began to adjust prices on select routes and in select cities based on costs and demand elasticities. We expect that these changes will accelerate Lyft’s path to profitability."
Guggenheim sees reason to believe these moves can ease Lyft's transition to profitability. However, while the company's revenues shot up at the aforesaid second call - its earnings actually declined. Uber also reported a lackluster second quarter on August 8 (read our coverage here). Since their IPO, Lyft is down 30% and Uber is down a similar 25%. In contrast, over the same period, the S&P 500 and the Dow Jones Industrial Average are down 0.3% and 2.3% respectively. Furthermore, the selective raising of prices suggests careful screening of regions where price elasticity of demand is low, indicative of a strategy that cannot be scaled and implemented universally. At this point, it is doubtful even a large scale significant bump in prices could save the ride-hailing business model (or if such a move could be executed without executing the company concerned).
When Lyft's Lock-in lifted
However, all is not lost for the little giant. Lyft's IPO back in March set up the next crucial event to watch for stakeholders - the expiry of the lock-in period. The said period expired earlier than anticipated on August 19. At expiry, the management, promoters and other pre-IPO investors could sell off their stake. Subverting the expectation, Lyft's stock saw only a 1.5% fall. The investor sentiment remains strong on the back of a bull streak and Guggenheim's new target of $60 actually falls significantly short of JP Morgan's analyst Doug Anmuth "overweight" rating and a $90 price.