Ride sharing service Lyft (NASDAQ: LYFT) reported results in line with analysts' expectations in Q4 FY2023, with revenue up 4.2% year on year to $1.22 billion. It made a GAAP loss of $0.07 per share, improving from its loss of $0.74 per share in the same quarter last year.
Lyft (LYFT) Q4 FY2023 Highlights:
- Revenue: $1.22 billion vs analyst estimates of $1.22 billion (small beat)
- EPS: -$0.07 vs analyst estimates of -$0.18 ($0.11 beat)
- Free Cash Flow of $14.94 million is up from -$30.01 million in the previous quarter
- Gross Margin (GAAP): 39.3%, up from 25.6% in the same quarter last year
- Active Riders: 22.4 million, up 2.04 million year on year
- Market Capitalization: $4.87 billion
Founded by Logan Green and John Zimmer as a long-distance intercity carpooling company Zimride, Lyft (NASDAQ: LYFT) operates a ridesharing network in the US and Canada.
Uber created the first ride hailing app, allowing users to summon black limousines via their mobile devices, an innovation that disrupted modern transportation. Lyft followed and expanded the service to the mass market, positioning it as a casual, friendly carpool experience that aimed to appeal to younger generations. Initially, Lyft’s drivers had a pink mustache affixed to the grill of their car, which has since been replaced by an “Amp” device, which lights up the car’s dashboard to help riders easily find their car.
The company’s value propositions are multiple. For individuals, Lyft effectively lowered the cost per mile for taxi transportation vs. legacy cabs, while providing ease of use and convenience. For drivers, it has provided flexible earning opportunities.
The iPhone changed the world, ushering in the era of the “always-on” internet and “on-demand” services - anything someone could want is just a few taps away. Likewise, the gig economy sprang up in a similar fashion, with a proliferation of tech-enabled freelance labor marketplaces, which work hand and hand with many on demand services. Individuals can now work on demand too. What began with tech enabled platforms that aggregated riders and drivers has expanded over the past decade to include food delivery, groceries, and now even a plumber or graphic designer are all just a few taps away.
Lyft’s (NASDAQ: LYFT) main competitor in ride hailing is Uber (NYSE:UBER).
Lyft's revenue growth over the last three years has been very strong, averaging 31.7% annually. This quarter, Lyft reported lacklustre 4.2% year-on-year revenue growth, in line with analysts' expectations.
As a gig economy marketplace, Lyft generates revenue growth by expanding the number of services on its platform (e.g. rides, deliveries, freelance jobs) and raising the commission fee from each service provided.
Over the last two years, Lyft's users, a key performance metric for the company, grew 12.8% annually to 22.4 million. This is decent growth for a consumer internet company.
In Q4, Lyft added 2.04 million users, translating into 10% year-on-year growth.
Revenue Per User
Average revenue per user (ARPU) is a critical metric to track for consumer internet businesses like Lyft because it measures how much the company earns in transaction fees from each user. This number also informs us about Lyft's take rate, which represents its pricing leverage over the ecosystem, or "cut" from each transaction.
Lyft's ARPU growth has been mediocre over the last two years, averaging 4.9%. However, the company's ability to continue increasing prices while growing its users shows that users still find value in its platform. This quarter, ARPU declined 5.3% year on year to $54.67 per user.
A company's gross profit margin has a major impact on its ability to exert pricing power, develop new products, and invest in marketing. These factors may ultimately determine the winner in a competitive market, making it a critical metric to track for the long-term investor. Lyft's gross profit margin, which tells us how much money the company gets to keep after covering the base cost of its products and services, came in at 39.3% this quarter, up 13.7 percentage points year on year.
For gig economy businesses like Lyft, these aforementioned costs typically include server hosting, customer support, and payment processing fees. Another cost of revenue could also be insurance to protect against liabilities arising from providing transportation, housing, or freelance work services. After paying for these expenses, Lyft had $0.39 for every $1 in revenue to invest in marketing, talent, and the development of new products and services.
Lyft's gross margins have been trending up over the last 12 months, averaging 35.3%. This is a welcome development, as Lyft's margins are below the industry average, and rising margins could suggest improved demand and pricing power.
User Acquisition Efficiency
Consumer internet businesses like Lyft grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
Lyft is quite efficient at acquiring new users, spending only 30.7% of its gross profit on sales and marketing expenses over the last year. This efficiency indicates that Lyft has a highly differentiated product offering, giving it the freedom to invest its resources into new growth initiatives.
Profitability & Free Cash Flow
Investors frequently analyze operating income to understand a business's core profitability. Similar to operating income, adjusted EBITDA is the most common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of a company's profit potential.
Lyft's EBITDA was $66.6 million this quarter, translating into a 5.4% margin. The company has also shown above-average profitability for a consumer internet business over the last four quarters, with average EBITDA margins of 4.9%.
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Lyft's free cash flow came in at $14.94 million in Q4, turning positive year on year.
Lyft has burned through $248.1 million of cash over the last 12 months, resulting in a negative 6.1% free cash flow margin. This below-average FCF margin stems from Lyft's continuous need to reinvest in its business to penetrate the market.
Key Takeaways from Lyft's Q4 Results
It was good to see Lyft add new users this quarter, enabling it to beat Wall Street's revenue and EPS estimates. Furthermore, in a potential milestone event, the company expects to generate positive free cash flow for the full year 2024, converting roughly half its forecasted full-year EBITDA into cash. Lyft also announced it will be hosting an Investor Day on June 6th in New York City. Overall, the company's guidance was encouraging, especially as competition with ride-sharing peer Uber heats up. The stock is up 18.4% after reporting and currently trades at $14.38 per share.
Is Now The Time?
When considering an investment in Lyft, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.
Although Lyft isn't a bad business, it probably wouldn't be one of our picks. Although its revenue growth has been good over the last three years and its growth over the next 12 months is expected to be higher, its gross margins make it extremely difficult to reach positive operating profits compared to other consumer internet businesses. And while its user acquisition is very efficient, the downside is its cash burn raises the question if it can sustainably maintain its growth.
At the moment Lyft trades at 15.5x next 12 months EV-to-EBITDA. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Lyft doesn't trade at a completely unreasonable price point.
Wall Street analysts covering the company had a one-year price target of $13.78 per share right before these results (compared to the current share price of $14.38).
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