Lyft Scores Upgrade, Analyst Praise After Strong Q3

LYFT Inc LYFT reported a significant third-quarter sales beat Wednesday that was driven by 28% growth in active riders and 27% growth in revenue per active rider. Contribution margins improved by 500 basis points, and earnings before interest, tax, depreciation and amortization were better than anticipated.

“This strong performance is driving the potential for cash flow profitability sooner than expected, which it should achieve by 2021,” Tigress Financial analyst Ivan Feinseth wrote after the print. 

Goldman Sachs Upgrade

The report inspired Goldman Sachs analyst Heath Terry to upgrade Lyft to Buy.

“Lyft continues to gain share and is beginning to show the operational efficiencies that we’ve previously noted are critical to the ride-hailing industry maturing beyond its hyper-competitive, venture-funded phase,” Terry said in a Thursday note. 

Nevertheless, Golman Sachs cut its price target from $71 to $58 to reflect multiple contraction.

Earnings Reaction

D.A. Davidson analyst Tom White attributed Lyft’s outperformance to fare pricing optimization, penetration of high-value rides and the expansion of Lyft Business. Another touted metric was operating efficiency, which improved as marketing expenses dropped 24 basis points. 

Lyft has signaled a faster path to profitability, which muted some of the surprise factor for the quarterly print, said Credit Suisse analyst Stephen Ju. 

 “That said it was another impressive result with revenue beating primarily due to higher per-rider monetization (likely due to greater frequency/usage), with leverage shining through on moderating insurance costs as well as declining incentives.”

Insurance Overhang

Lyft’s EBITDA excluded an $87-million negative insurance reserve adjustment.

“The adjustment takes a bit of the shine off of LYFT’s EBITDA performance in 3Q, but we note the adjustment was 38% less than LYFT reported in 2Q’19,” said D.A. Davidson's White.

“Moreover, LYFT indicated it’s looking into selling some of these claims to a third-party to reduce future volatility on this front, and management still sounds very bullish about LYFT’s ability to drive leverage in its insurance-related expenses over time.”

Bank of America Merrill Lynch largely dismissed the concern.

“These claims likely stem from 2016-2017, and the ridesharing industry has added new, large insurers that can improve accuracy of claims handling and reserves,” analyst Justin Post said in a Wednesday note. “Management noted that Progressive and State Farm were added as insurance partners in key states in Q3, which should help reduce insurance costs, risk exposure, and insurance cost volatility.”

The Ride-Sharing Race

Lyft differentiates itself from Uber Technologies Inc UBER through product innovation, according to Raymond James.

“Fast Match should help with airport rides (positive mix) while the new Pink program should drive loyalty around high value users,” analyst Justin Patterson said in a Wednesday note. 

Those aren’t the only critical distinctions.

“Importantly, Lyft’s strategy continues to diverge from Uber’s with its focus on passenger transportation and not food delivery or trucking services as Uber has been emphasizing,” said Tigress Financial's Feinseth.

“Lyft’s ongoing innovation and marketing initiatives continue to drive accelerating growth in market share gains.”

Analysts consider Lyft well-positioned to fend off future rivalry risks.

“In terms of risks, competitive intensity could conceivably flare up again, but we believe LYFT’s differentiated/ healthier brand and its push into new uses cases like Enterprise can help mitigate any impact to volumes or margins,” said D.A. Davidson's White. 

Regulatory Risks

Despite posting consistent improvement in key metrics, Lyft trades well below its IPO price.

“We believe that indicates regulation remains an overhang toward ownership,” said Bank of America's Patterson. “As regulation moves toward a resolution and impacts become more clear, we believe sentiment improves.”

The Ratings

Analysts remain largely optimistic about Lyft’s potential.

“The bottom line is that LYFT has delivered three solid quarters since its IPO, and we believe many (if not most) of the tailwinds that have driven LYFT’s results thus far this year can sustain for the next several quarters at least,” White said. 

Goldman Sachs upgraded Lyft from Neutral to Buy and cut the price target from $71 to $58. 

• Credit Suisse maintained an Outperform rating and $96 target;
• D.A. Davidson maintained a Buy rating and raised its target from $74 to $75;
• Raymond James maintained an Outperform rating and $85 target; and
• Tigress Financial recommended purchase.

Lyft shares were down 4.39% at $42.18 at the time of publication. 

Related Links:

Uber, Lyft To Campaign Against California Gig Economy Law

Morgan Stanley Is Bullish On Ride-Shares, But Prefers Uber Over Lyft Right Now

Photo courtesy of Lyft.