Lift Gets Hit With First "Sell" Rating – The Motley Fool

Ridesharing Platform Lift (NASDAQ: LYFT) has only traded on the public market for a few days, and it has been an uneven trip. Stocks dropped below the IPO offer price of $ 72 yesterday, with many other Silicon Valley tech unicorns preparing to be public and keeping an eye on the action. Lifting shares were just hit with their very first sales class by Seaport Global Securities, which awarded a $ 42 price after they started covering.

Here's what investors need to know.

Image source: Lift.

Raised Valuation Requires a "Jump Run"

The main concern of Port Authority analyst Michael Ward is appreciation. Ridesharing is still a relatively exciting market, with Lyft estimating that only 1% of the miles traveled in the United States come from rideshare networks. While adoption continues to march higher, especially in urban cities, it is less clear where the upper limit will be, as many consumers still prefer to own private cars, especially in suburban and rural areas.

"Investors have to take a big shot of belief that the millennia and later generations will refrain from ownership of a car and opt for the dependence on ridesharing service," the analyst writes. "In spite of the optics of vehicles being an underutilized resource, we believe that people will continue to own their own vehicles as primary transport and instead rely on ridesharing services as a convenient addition."

Image source: Lift.

It is true that the average driver's car is underutilized – most vehicles are idle 95% of the time – and we collectively allocate too much real estate for parking. It is also true that people place a premium on the independence, convenience, and freedom of mobility owned by a car. Although Lyft is expected to grow active riders, which are now over 18.6 million and will help increase revenue, profitability will remain elusive in the foreseeable future.

Ward is modeling for Lifting to generate $ 3.4 billion in revenue in 2019, up from $ 2.2 billion in 2018. Sales will then climb to $ 5.5 billion by 2021, according to Wards estimates. Lifting is aimed at an EBITDA margin of 20%, but really has no good ideas on how to get there. For reference, here's Lyft's adjusted EBITDA margins from the last three years.

Data Source: Prospectus.

While valuation is often a comparative exercise to measure a company against a peer, Lyft has no public record rivals (yet). Nevertheless, no one will argue that the lift shares are cheap, as they are currently trading for over 10 times while the company's costs are already too high to show a profit. Intensifying competition will only make positive margins even more difficult to achieve, and Uber is notorious for its willingness to burn through investor capital to expand market share at the expense of rivals.