3 Reasons Investors Should Be Skeptical of Lyft’s 2020 Rally

Stocks to sell

Last year was certainly the year of the IPO, or more accurately, the year of the failed IPO. In 2019 we saw a range of buzzy tech firms fall significantly in the days, weeks and months following their debuts. Ride-hailing service Lyft (NASDAQ:LYFT) is one such company.

Regulatory Headwinds Could Disrupt Lyft Stock in 2020

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With LYFT stock trading nearly 40% below its initial offering price, some are starting to return to the beleaguered stock. However, now isn’t the time to get swept up in the wave of optimism — Lyft still has plenty of trouble ahead. 

Here’s a look at three reasons to pass on LYFT stock today.

The Timing Is Off

One of the arguments for buying Lyft now is the fact that the stock was punished post-IPO as investors questioned whether it could live up to the market’s lofty expectations. At a certain point, the share price was low enough to make it look interesting. And when that happened, investors returned to the stock.

Next, management surprised investors with revised guidance claiming profits were coming in 2021. Things look perfectly positioned for a rally, right?

Wrong. Lyft is about to become an unfortunate victim of timing. The past year has been a bumper one for services like ride-hailing, meal delivery and streaming. Consumers have benefitted from an abundance of convenient services at rock-bottom prices as tech companies work to grow their user base at any cost. 

That model is about to shift, though. At some point, businesses have to start turning a profit and the only way to do that is to raise prices. We’ve already seen Netflix (NASDAQ:NFLX) start to slowly increase its prices, and the same is likely coming for the rest of the bunch. That’s a huge question mark when it comes to Lyft’s forecast — are people willing to pay more to ride with Lyft?

I think not. Switching between Uber (NYSE:UBER) and Lyft and taxis, for that matter, doesn’t require much. Lyft will need a more compelling moat in order to convince me of its future profits. 

Regulators Are Stepping In 

The other major issue that Lyft is facing right now is an increasingly challenging regulatory environment. California lawmakers recently passed Assembly Bill 5, a law that requires gig companies to reclassify their contractors as fully fledged employees. Although the law went into effect on Jan. 1, Lyft has effectively refused to comply. 

Moving forward, the firm will fight alongside peers to make changes to the way the law is written. Even if AB5 is amended, the fight isn’t over. The gig economy has seen a rapid expansion over the past few years and regulators are trying to keep up. 

If AB5 stands, Lyft will struggle to become profitable as its costs will skyrocket. But even if the law is changed, Lyft and its peers are likely to continue to battle lawmakers until gig workers are protected. 

Profitability by 2020 Is a Lofty Goal

Even if you don’t believe the risks I outlined above exist, Lyft is going to struggle to turn a profit by 2021. When management said profitability was closer than expected, investors cheered and the stock saw a bump. But those gains — and more — will likely be lost over the next few quarters when investors realize that Lyft can’t execute on those plans.

The firm was able to move much closer to profitability in the third quarter, something many took as a sign that management’s promises were trustworthy. However, it’s worth noting that the firm also cut its marketing expenses significantly. The result of those cuts was a drop in new rider growth.

The bottom line is that Lyft doesn’t appear able to both deliver aggressive growth and produce a profit. It’s nice to hear management is expecting it, but I wouldn’t hold my breath. The lack of competitive moat coupled with the cost of poaching riders from Uber and taxis makes Lyft’s goal look unattainable. 

What’s more, while Lyft is cheaper than it was back in March, it’s not a bargain by any stretch of the imagination. LYFT stock trades at 4.4 times its sales — that’s double the S&P 500’s average price-to-sales ratio. Expectations for a Lyft rebound are high, so the firm’s Q4 results are under a lot of pressure. Unless the company is able to prove that its customers are sticky, I’d dump Lyft stock and watch from the sidelines. 

As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.

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