Lyft's Risk-Reward Finally Looks Favorable, Needham Says In Bullish Initiation

Shares of Lyft Inc LYFT traded as low as $35 this week, and Needham said the stock is offering investors a favorable risk-reward profile for the first time.

The Lyft Analyst

Brad Erickson initiated coverage of Lyft with a Buy rating and $48 price target.

The Lyft Thesis

Lyft's stock has dropped 30% since its fourth-quarter report and is trading at an "unreasonably wide" valuation discount versus its rival Uber Technologies Inc UBER, Erickson said in a Thursday initiation note. (See his track record here.)

Even though Uber is the superior investment idea within the mobility space, the "depressed sentiment" on Lyft's stock is still an opportunity for investors, the analyst said.

Part of Lyft's stock decline over the past few months can be attributed to declining net ride addition trends, Erickson said. Moving forward, the company will be judged against "similarly tempered trends" that represent a bar that can be reached, if not exceeded, he said.

Meanwhile, Lyft and Uber's businesses have only been operating at scale since around 2016, and both companies are entering into a new multiyear price optimization that will prove to be a "meaningful tailwind" in terms of revenue per active rider and overall revenue growth, the analyst said.

Finally, Lyft's management has a reputation of issuing conservative guidance, which may imply a faster ramp to profit than investors expect, Erickson said.

The company can improve its S&M spending, which could translate to an early 2021 profit versus management's EBITDA breakeven target in the fourth quarter of 2021, according to Needham.