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Is Lyft Going To Make It As Acquisition Rumors Swirl?

What should investors make of Lyft and ridesharing companies in general as rumors of acquisition swirl around the company?

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This story originally appeared on MarketBeat

Lyft (NASDAQ: LYFT) stock has been rising on the back of rumors of acquisition from an activist investor. Lyft’s stock is down over 66% over the past year, as exuberance stemming from the previous few years that led to excessive valuations has started to moderate, especially within tech sectors, leading to many stocks retreating significantly from their highs.

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The ride-sharing business model has been under significant scrutiny in recent times as the continued lack of profitability has continued to weigh on investor sentiment, with many wondering if there will ever be a point when the model can become sustainable. A lack of operating cash flow continues to be a major issue, and cutting costs and increasing prices seem to be the only viable alternative at this point. Considering operating losses continue to come in around 30% of revenue, that leap to profitability seems increasing further away.

The ride-sharing model always had its flaws and, over time, became an increasingly complicated business model, which included multiple layers of costs, including investors, marketing, back-end, and of finally the base costs such as vehicle costs and driver fees. These costs tend to add up over time and can lead to a lack of profitability over the long term. The biggest cost saver for Lyft tends to be efficiency. The algorithm is supposed to reduce the number of miles driven without a passenger, which is an issue that normal passenger taxis usually face, but the current structure clearly isn't working. And while Lyft has stated that it plans to move to a driverless model in the long term, the reality of driverless cars is that they are still quite a few years away. The stock remains afloat on the idea that, eventually, the model will shift to driverless taxis is the biggest incentive that keeps the industry afloat, but investors are becoming increasingly pessimistic.

Lyft’s stock was up on acquisition rumors, and the company could be a good target mainly due to the fact that management has done a poor job of containing costs. The company recently laid off 60 employees and shut down its in-house rental program.  Furthermore, management has continued to pay itself millions of dollars in stock-based compensation despite no profitability; any activist that decides to take over the company will be taking a look at this issue.

The reality is Lyft’s business model requires a 10-15% increase in prices and cost-cutting measures that range around $150-200 million, which would mean reducing administrative costs, research and development costs, and moving finally moving towards a much more sustainable business model. The combination of the two would get them to mid-single digits profitability, at which point the business model would be viable.

What could be Lyft’s value if it were to be taken over?

Ride-sharing investors will likely be disappointed as any takeover bids are not likely to be near what they had expected. The tangible book value of the company remains low at around $2.5-$3 per share, the company’s inability to produce cash, and no chance of the business becoming a high-margin business, which is what ridesharing apps had initially marketed themselves as to get the valuations which they did from investors, means any takeover bid will not be very high.  At this point, there could be an argument the stock could easily decrease by another 30-40%, and investors will consider this factor before making a bid. The high beta, combined with poor profitability, means the stock is highly susceptible to fall as the market continues to fall on the back of rising rates and economic headwinds.  Also, institutional investors make up a large percentage of the current shareholdings at over 79%; this would make it hard for anyone looking to acquire to quickly strike a deal. The current market capitalization stands at $6 billion, and that could reduce to around $4 billion if the market were to continue to slide. This would mean investors could come in around $5 billion.

It remains to be seen what happens to Lyft moving forward, but for now, multiple questions remain around the business mode, which will have to be sorted out before the company gets taken over. Until then, it will be a wait-and-watch scenario.

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