8 Lyft Analysts React To Q2 Earnings, California Risks

Ride-hailing company Lyft Inc LYFT reported second-quarter results that immediately sent shares trading higher. But the stock reversed course and dipped into negative territory as the company acknowledged it may need to pause its operations in California.

The Analysts

CFRA analyst Angelo Zino maintains a Hold rating on Lyft's stock with an unchanged $32 price target.

Stifel analyst Scott Devitt maintains a Hold rating on Lyft with a price target lowered from $34 to $30.

Morgan Stanley analyst Brian Nowak maintains an Equal-weight rating on Lyft with a price target lifted from $31 to $34.

Needham analyst Brad Erickson maintains a Buy rating on Lyft with a $41 price target.

KeyBanc Capital Markets analyst Edward Yruma maintains an Overweight rating on Lyft with a $48 price target.

DA Davidson analyst Tom White maintains a Buy rating on Lyft with a $37 price target.

Piper Sandler analyst Alexander Potter maintains a Neutral rating on Lyft' with a $31 price target.

BTIG analyst Jake Fuller maintains a Buy rating on Lyft with a price target lowered from $52 to $40.

Related Link: Uber, Lyft Must Classify Drivers As Employees, In Compliance With California Law, Judge Rules

Q2 Recap: Lyft reported a 61% drop in revenue to $339 million as the company suffered from a 60% decline in active riders and a 2% drop in revenue per active rider. EBITDA loss of $280.3 million was narrower than the $295 million loss expected.

Management did note a 78% improvement in monthly rideshare rides in July versus April.

Q2 Rideshare Trends: Lyft's management commented on rideshare trends, noting a 75% year-over-year decline in rides in April, down 70% in May, down 61% in June, and down 54% in July, Devitt wrote in a note. Meanwhile, August rides through the week ending on the 9th were down 53%.

Lyft's third-quarter revenue will more closely track rides compared to the second quarter as management invests in driver supply incentives as the company struggled from the demand for rides outpacing the availability of drivers, Zino wrote in a note.

3 Key Takeaways: Nowak said Lyft's decision to suspend operations in California could be a positive as it would help generate favorable sentiment and emphasize the importance of a ride-hailing service.

Second, Lyft's recovery in rides was "choppy" but still better than expected. July rides were down 54% year-over-year and should continue trending higher as more people return to regular commutes, travel or social gatherings.

Third, management believes there is upside potential to its long-term 70% contribution margin goal and 20% EBITDA margin goal.

What Bulls And Bears Like: Lyft bulls are able to solidify their thesis after management's July and early August rides commentary showed continued improvement, Erickson wrote in a note. Bulls believe Lyft stands to benefit from an eventual full re-opening of the economy.

Bulls also appreciate management's commitment to cut costs and invest in driver supply related initiatives.

On the other hand, bears are likely to point out that Lyft's business is still down more than 50% on a run-rate basis and management has to spend more than expected to incentivize drivers, the analyst said. Lyft could be forced to temporarily forego its California operation that represents around 16% of total rides.

Cost Reduction Benefits: Lyft's management deserves credit for its commitment to expense discipline as total operating expenses were lower 30% year-over-year, Yruma wrote in a note. Total incentives were down 96% from the first quarter while sales and marketing expenses will likely be permanently lower as a percentage of revenue.

While driver incentive expenses will increase, it will be more favorable in the medium-term and shouldn't impact management's goal of showing positive adjusted EBITDA by the end of 2021 and generate margins north of the original target of 20%, the analyst wrote.

What Happens If Lyft Goes 'Dark': If Lyft decides to go "dark" in California, the company's third-quarter EBITDA loss forecast of $265 million could be seen as overly optimistic, White wrote in a note. Also, a complete pause of operation in California would renew investor concerns that other states would follow suit and further delay the company's path to EBITDA profit.

However, the concept of new regions implementing new laws that could force ride-hailing companies to pause operations would be "very unpopular" with voters, especially during a pandemic. The California voters are likely to support Prop 22 in November that would overrule any legal decision made so far.

"At the end of the day, we believe that California voters, if/when faced with having no Ridesharing industry in their state, will vote to support Prop 22, but there is clearly some uncertainty on how the election will play out," the analyst wrote.

'Rocky' Path Forward: Potter said Lyft's ability to reach a breakeven EBITDA is still a possibility within the next 18 months but the path forward is "rocky." The coronavirus by itself is a big enough problem but the California legal battle adds a second headache.

The financial impact of Lyft being forced to permanently label drivers as employees would be "substantial," especially if other regions follow suit.

Regardless of what happens over the next few months, investors should expect "volatility mostly to the downside until this issue is resolved," the analyst wrote.

Discount Valuation To Uber: Lyft should show a 44% year-over-year decline in rides in the back half of 2020 and 2021 revenue outlook is revised from $4.319 billion to $3.04 billion, Fuller wrote in a note. This outlook reflects "more of a macro and/or vaccine call" and could be advised as needed.

In the meantime, the research firm's revised $40 price target is based on 25 times 2025 estimated GAAP earnings and represents a slight multiple discount to Uber. Lyft's rival ride-hailing competitor warrants the higher multiple given a larger total addressable market and exposure to the food delivery segment.

Price Action: Share of Lyft closed lower by 5.3% at $28.88.