EUR 850.00 For Business Accounts Only

Morningstar | A Lyft-Off 1Q, But Guidance Below Our Expectation; Maintaining $72 FVE; Shares Fairly Valued

Lyft reported its first quarterly results as a public company with revenue and operating loss that beat Street expectations mainly due to improvement in user monetization, in addition to some early signs of operating leverage. Lyft also announced it will begin working with Alphabet’s Waymo to make Waymo’s self-driving cars available on its platform. Strong growth in the firm’s number of riders plus growth in user monetization display the firm’s network effect moat source and supports our narrow moat rating of Lyft, in our view. While Lyft started this year with impressive revenue growth, management did provide what we view as lower than expected full-year 2019 revenue guidance, as publicity surrounding its IPO that boosted first-quarter numbers may not continue throughout the year. In addition, further investments in bike and scooter services likely will delay Lyft’s profitability by one year, in our view.

We adjusted our projections accordingly but are maintaining our $72 per share fair value estimate as we now expect higher gross margin and lower growth in sales and marketing expenses to widen Lyft’s operating margin beyond 2024 more than initially anticipated. However, we continue to recommend waiting for a wider margin of safety before investing in this narrow-moat and very high uncertainty name as the stock remains in 3-star territory.

Lyft’s first-quarter total revenue came in at $776 million, up 95% from last year, driven by growth in riders (up 46% year over year to 20.5 million) and revenue generated per rider, which increased 33% from last year to $37.86. Non-GAAP gross margin increased to 50% from 35% last year and from the prior quarter’s 46% as various components of cost of revenue, including transaction processing, hosting, and insurance, declined as a percentage of revenue. We expect slower growth in those costs to drive further gross margin expansion during the next 10 years.

While non-GAAP R&D expenses grew at the same rate as revenue, there was further indication of operating leverage with sales and marketing costs as a percentage of revenue declining 1,300 basis points to 29%. Such improvement, which we believe will continue, along with healthy growth in riders and revenue per rider, are indicative of Lyft’s network effect moat source, in our view. We note that the company also has exclusive agreements with some of the larger cities for bike sharing, which we think may further lessen Lyft’s need for much higher sales and marketing spending. Operations and support increased to 17% of revenue from 15% last year as Lyft is spending more on expanding its bikes and scooter services. We do not expect those investments to outpace revenue growth after 2019.

While Lyft’s full-year revenue guidance was lower than we expected, we are pleased that the firm is more effectively monetizing its growing user base. It is focusing more on servicing in areas with and during times of high demand where it may not face too much pricing pressure. In addition, management stated that some riders are not comparing prices as aggressively as they were before, which bodes well for both Lyft and Uber. We think this could be an early sign of stabilization in prices, which may help Lyft further grow its revenue per user. We believe this is also indicative of a market that currently is and likely in the future will be dominated by two players--Lyft and Uber. Plus, while we don’t think Lyft has switching costs or brand equity moat sources, we do believe that additional services provided (such as bike and scooter options) via one app could increase the likelihood of users to continue using the app. The firm is progressing toward becoming a one-stop shop for on-demand transportation.

We did welcome the announcement that Alphabet’s Waymo autonomous vehicles will be available on Lyft’s platform in Phoenix, Arizona. According to Lyft, by third-quarter 2019, the firm’s platform will have around 10 Waymo-powered vehicles available for its riders. While Lyft did not provide any additional information, we do think this is the first step toward attracting other autonomous vehicle providers to the Lyft platform. We believe Uber can do the same. However, the economics remain unclear. In our view, such services may generate higher margins as some costs, such as insurance and compensation to assist drivers, are likely to be shared among the two parties. However, it remains unclear as to when such revenue will be material for Lyft.

Regarding our projections, we lowered our 10-year revenue CAGR assumption to 22% from 26%. While the lower revenue will push Lyft’s profitability out one year to 2023, we remain confident the firm will expand margin further thereafter, mainly due to higher gross margin and more operating leverage from slower growth in sales and marketing and operations and support expenses. We now expect Lyft’s operating margin to hit 19% in 2028, from operating losses through 2022.