SKrow
Investment Thesis
Lyft (NASDAQ:LYFT) is getting a kick when it’s down. The Biden Administration’s move could not have come at a worse time for Lyft. For investors, realistically, the investment thesis has now changed.
The only question that needs to be answered is this, what to do when the facts change?
Why there should be a new rule number 2, that is not Warren Buffett’s ”don’t forget rule number 1”.
No Nuance Left
The market is in turmoil. Across the board, all the unicorns are melting away. One limbic emotion rules the day: sell first and ask questions later.
Today Lyft trades near its all-time lows. Therefore, one thing is clear, nobody holding Lyft today is holding onto any gains. That implies that the amount of negativity facing Lyft today is at its strongest.
The Gig Proposal
The Biden Administration’s moves to clamp down some of the avenues that gig companies treat workers have come under fresh scrutiny.
The idea being put forward is that this would remove a lot of the ”flexibility” that Lyft and other gig companies have over workers.
As you’d expect all sides of the argument now jump into the fray. My own argument is that I simply have no idea how things will unfold. But I suspect that there will be some adjustments to be made, but that ultimately this could be enough to break the bull case.
Lyft’s Profitability Profile in Focus
Realistically, this could substantially change Lyft’s operating costs. Wedbush Securities analyst Dan Ives, and others, have put forward the suggestion that this could substantially plague Lyft’s operating costs by as much as 20%.
Now, let’s be honest, Lyft was already struggling to reach any semblance of profitability. Here’s a business whose cash flows were clearly negative. And that was before we opened up the discussion of whether or not stock-based compensation is a real cost of not.
Recall, 50% of Lyft’s gross profits equaled its stock-based compensation. There was already no space on its income statement to absorb higher costs. And if this proposal comes into force, it will be the nail in the coffin for Lyft.
On the other side of the argument, Lyft would be able to remark that the company has made significant strides already to reach profitability.
Indeed, its adjusted EBITDA in Q2 2022 was up 232% y/y. So, the company was clearly making substantial efforts already to reach clean GAAP profitability.
Takeaway: There’s Never Just One Cockroach in the Kitchen
In conclusion, investors got involved in Lyft under the narrative that Lyft was going to undercut and underprice taxi services. It was going to be the low-cost alternative.
Even if the majority of Biden Administration’s proposal gets watered down, enough will still percolate through, which would substantially impact Lyft’s prospects. And this was already a company that was struggling.
In investing, the number one rule is ”never lose money”. And rule number 2 is ”don’t forget rule number 1”. However, I believe that rule number 2 should actually be ‘‘forget the price you paid for the stock”.
It makes absolutely no difference whether you are up or down on your investment. The only thing that should matter is when you look ahead, are the prospects likely to improve or not? And I believe that if you consider this objectively, with the facts that are available, the outlook isn’t improving.
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