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Stock Analyst Update

Lyft Guidance Disappoints but Market Overreacting

Lyft, along with Uber, are trading at attractive prices

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While Lyft (LYFT) reported better-than-expected first-quarter results, it provided disappointing second-quarter top- and bottom-line guidance. In our view, the market is overreacting as the stock is down 25% in after-hours trading. 

Our takeaway from the call and Lyft’s outlook was that demand for ridehailing services will strengthen further in the second half of this year and Lyft has decided to spend more to increase supply which is necessary given Lyft’s already higher driver utilization. While such an investment could also be due to higher fuel costs which management denied, we think it also sheds some light on Lyft’s network effect attracting slightly less drivers than the clear U.S. market leading Uber’s. However, the results and the firm’s outlook also indicate that the network effect on both supply and demand sides remain intact.

We increased our revenue growth assumption for 2022 but lowered the margin expansion we had modeled resulting in a fair value estimate of $65, down from $66. In our view, the market’s reaction to Lyft’s guidance is not warranted. We continue to view both Lyft and (UBER) as attractive investments.

We remain confident in Lyft’s network effect on the supply side for a couple of reasons. First, even without higher incentives and with the impact of the omicron variant in early first quarter, Lyft’s driver count still increased 40% year over year during the quarter in response to higher demand, with a 70% jump in new drivers signing up. According to Lyft, the platform also had more drivers at the end of March than it did in January. 

Second, at the same time, driver utilization continued to improve as rides per driver was above prepandemic levels while the estimated time of arrival improved 30% from last year. While maximizing driver or vehicle utilization is the objective, Lyft must balance that with further improvement in quality of service, which requires an increase in supply.

Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.