Lyft Stock Is An Intriguing Trade for Market Bulls Ahead of Earnings

An optimistic market and solid earnings could drive a breakout in LYFT next month

Lyft (NASDAQ:LYFT) stock remains one of the market’s more divisive stocks. Bears see a ride-sharing model with no guarantee of profitability and increasing regulatory risk. Bulls point to impressive growth and a reasonable, if not cheap, price-to-sales multiple.

Indeed, even analysts are notably split. According to data from Yahoo! Finance, the lowest of 35 price targets on LYFT stock sits at $35. The most bullish, at $96.50, is almost three times as high — and implies 100%-plus upside from current levels.

From a long-term standpoint, I tend to lean toward the bearish side. California’s AB5, passed in September, and threatens both Lyft and rival Uber (NYSE:UBER) in that key state. Lyft’s Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss has been over 20% of revenue so far in 2019.

Admittedly, on the company’s third quarter conference call, Lyft management projected EBITDA profitability by the fourth quarter of 2021. But that figure excludes still-hefty share-based compensation, and Lyft has a long way to go to support the current $14 billion market capitalization. Neither it nor Uber has proven it can drive consistent, real profitability and cash flow without significant raises in rates and/or driver pay.

That said, as I detailed last month, Lyft has posted strong performance in the last three quarters, at least relative to expectations. LYFT stock has underperformed that of Uber and other 2019 initial public offerings that struggled out of the gate. And so there are reasons to see LYFT as an intriguing bullish trade ahead of fourth-quarter earnings on Feb. 11, even for investors still somewhat skeptical about the long-term outlook.

The Case for LYFT Stock Ahead of Earnings

Again, the long-term fate of Lyft, and the ride-sharing model more generally, is up for debate. It’s possible that ride-sharing becomes an integral part of the U.S. transportation system — and that Lyft keeps taking market share from Uber. In that bullish scenario, LYFT stock easily could become a multi-bagger: a valuation of $50 or $100 billion in a “blue sky” scenario is not impossible.

Meanwhile, from a near-term perspective, LYFT has an interesting setup. The company has crushed estimates in each of the three quarters it has reported as a public company. Third-quarter results on Oct. 30 were particularly impressive. Last week, Cascend Securities noted that the downloads of the Lyft app were strong in November and December. That’s an especially bullish sign given how important usage is to the long-term case for the stock.

And at the moment, the earnings beat doesn’t look quite priced in to LYFT stock. Shares have rallied 29% since bottoming in October. In contrast, Uber has gained 46% since early November. And other 2019 IPOs that declined in early trading similarly have outperformed. Chewy (NYSE:CHWY) has rallied 34%, and CrowdStrike Holdings (NASDAQ:CRWD) 37%. Pinterest (NYSE:PINS) has gained 31% in a matter of weeks despite a disappointing third-quarter report on Nov. 1.

In other words, investors seem more willing to own high-growth yet still-unprofitable companies. On a relative basis, however, LYFT hasn’t had the same bounce. In fact, resistance has held right around current levels since late November, which means a post-earnings gain could set up a technical breakout as well.

The Risks to the Trade

To be sure, owning LYFT into earnings is an aggressive trade for several reasons. For one, earnings beats haven’t translated into even short-term gains for the stock. Shares fell 11% after the Q1 report in early May. They gained 3% after the second-quarter release in August, but the rally ended the next day, in part because Uber earnings disappointed.

Investors sold the news again after Q3.

Of course, LYFT stock was much more expensive ahead of its first two releases. There’s likely more slack in the current valuation for a miss. And, in this case, its 2020 guidance as much as Q4 2019 results that will matter. With Wall Street looking for only 28% revenue growth in 2020, after a 60%-plus increase in 2019, there’s room for Lyft’s expectations to exceed those of the market. Whether or not upside guidance this time drives upside in LYFT stock remains to be seen.

There’s also the market risk heading into the report. U.S. stocks have shown increased volatility in recent sessions, and a pair of big sell-offs driven (presumably) by coronavirus fears suggests a “risk-off” mentality still could return at any time. LYFT stock has struggled even in the bullish broad market that has held since its IPO. It’s highly unlikely to rally in a more cautious environment.

Can Lyft Change Minds?

Finally, there’s the risk that, for many investors, long-term sentiment just isn’t going to change. An incremental $50 million in fourth-quarter revenue, or 2020 guidance that’s a few percentage points higher than expected, isn’t going to convert skeptics who believe that Lyft simply can’t or won’t ever make a real profit. The response to Lyft’s previous earnings releases suggest that’s a real problem: even seemingly blowout reports haven’t moved the stock higher.

To be honest, I’m still one of those investors, though as I wrote in December I’m more open to the bull case here. To take on the ride-sharing risk, I’d rather have Uber’s exposure to international markets and delivery services. But Lyft’s revenue growth, at least, has been impressive, and I’d expect it will be again in Q4. This time, that might be enough to change more minds — and lead LYFT to break out.

As of this writing, Vince Martin is long shares of Chewy. He has no positions in any other securities mentioned.