Should Long-Term Investors Buy Lyft Stock Now?

Stocks to sell

Many investors looking for a home run, i.e., a growth stock that lifts their portfolios tremendously, have invested in Lyft (NASDAQ:LYFT), the ride-sharing company that went public in March at an opening price of $87.24. On Mar. 29, the day of Lyft stock’s IPO, the shares reached  an all-time high of $88.60. Since then, the early owners of Lyft stock have been very frustrated.

While Lyft Stock has Potential, the Near-term Risks Outweigh the Upside

Source: Tero Vesalainen / Shutterstock.com

Although LYFT stock price is about 45% down from its all-time high,it’s likely to continue to be volatile and could cause more pain in the future. Therefore,investors who are considering  buying LYFT stock may want to wait on the sidelines several weeks before investing in the company.

Lyft’s Vital Stats

In 2018, Lyft, which was launched in 2012, was valued at about $15 billion. Lyft stock currently has a market cap of $14.3 billion.

The global ride-sharing market is expected to grow from about $61 billion in 2018 to $218 billion by 2025, representing an annual growth rate of almost 20%. In the U.S. there are two major players in the ride-hailing market: Uber Technologies Inc. (NYSE:UBER) and Lyft.

With about 20 million monthly active riders, mainly in the U.S. and Canada, Lyft has now become a strong competitor to Uber. The company claims it has about one-third of the ride-sharing market in the U.S.

On Aug. 2. Lyft announced its second-quarter earnings. Lyft stock’s quarterly revenue was $867.3 million, an increase of 72% year-over-year. Management expects revenue of $3.5 billion for the full year, or about $200 million higher than it previously forecast.

Short-Term Headwinds for Lyft Stock

Lyft is not yet a profitable company. In 2018, it lost over $900 million. And according to its Q2 earnings report, its net loss, excluding some items, was $197.3 million versus an adjusted net loss of $176.5 million in the same period a year earlier. Lyft now expects its adjusted loss for the year to be $875 million.

Management expects LYFT’s Q3 revenue growth to be between 54% and 56% YoY. The shares of younger, rapidly growing companies are far more volatile than market indices or mature companies. Whenever investors feel the growth of these companies could be slowing, they sell the stock first and ask questions later.

In simple terms, Lyft stock has to increase its revenue quickly. And its current business model may not be strong enough to provide that extra revenue. If there is an economic slowdown in the U.S., the owners of LYFT stock may feel that the company will face tough headwinds in the coming months. As a result,  the selling pressure on LYFT stock may continue.

Finally  the short-term charts indicate that investors should be cautious on LYFT stock. After the decline of LYFT stock since late March,  its technical charts look weak.  The shares will need to build a base before a sustained rally can take place.

Short Interest and LYFT Stock

If more than 20% of a stock’s float (available shares) is shorted, then even a small rise in its price could actually become a powerful short squeeze and propel the stock much higher.

At this point, 13.8% of LYFT stock is shorted. So although there are plenty of traders who have shorted Lyft stock, not enough shares of LYFT are being shorted to set the stage for a massive short-squeeze rally. I’d argue that, in the coming weeks, short-selling of LFT stock may increase and put further selling pressure on the shares.

The Bottom Line on Lyft Stock

In the coming weeks, I expect LYFT to be a battleground between investors and traders. Investors who don’t yet have a position in LYFT  may want to consider buying LYFT if the stock goes below $40. Lyft stock will become very attractive as it moves toward the $35 level.

Current owners of Lyft stock may also consider hedging their positions. For hedging strategies, covered calls or put spreads that expire on Oct. 18 could be appropriate, as straight put purchases are likely to be expensive due to heightened volatility.

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

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