Rideshare company Lyft stunned Wall Street today as it plummeted to $15.36, marking a -7.8% change compared to the S&P 500 and the Nasdaq indices, which logged -2.1% and -2.7% respectively. LYFT is -53.92% below its average analyst target price of $33.32, which implies there could be more upside for the stock. As such, the average analyst rates it at buy. Over the last year, Lyft has lagged behind the S&P 500 by -59.2%, moving -64.8%.
Lyft is a technology company. The tech sector encompasses a wide range of industries such as computer software, computer hardware, semiconductors, scientific instruments, communications equipment, and consumer electronics. Despite the sector’s spectacular boom and bust at the turn of the century, investors still flock to tech companies in the hopes of capturing gains.
Valuations in the technology sector are often very high, as investors are willing to overlook gaps in the fundamentals if they believe a company’s innovations can dominate or create new markets. Despite the significant risks involved, just about everyone from professional portfolio managers to amateur investors consider technology companies such as Facebook, Apple, Google, and Microsoft as “safe” bets.
As of the second quarter of 2022, the average Price to Earnings (P/E) ratio of US technology companies is 20.64, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
Lyft does not release its trailing 12 month P/E ratio since its earnings per share of $-2.29 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for LYFT of -6.7. Based on the company's positive earnings guidance of $1.07, the stock has a forward P/E ratio of 14.4.
The analysis of earnings can also shed some light on a company's competitive advantage, namely by focusing on gross profit margins: i.e. the company's revenue minus its cost of goods only. LYFT has gross profit margins of 35.1%, from which we can infer that its competitive advantage is probably not absolute, and is facing some pricing pressure from other companies within the same market. As a rule of thumb, gross profit margins over 40% may indicate a strong competitive advantage in many industries.
Companies have many other costs and sources of income occurring outside of their core business. Everything from equipment depreciation, returns on capital investments, legal costs, income from intellectual property, and interest payments on debt factor into the company's ultimate profitability.
We can see the effect of these additional factors in Lyft 's levered free cashflow of $223,599,872. This represents the amount of money that is available for reinvesting in the business, or paying out to investors in the form of a dividend. With a positive cashflow, LYFT is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors tend to focus on a stock's Price to Book (P/B) Ratio (its share price divided by its book value). As of the second quarter of 2022, the mean P/B ratio of the technology sector is 5.39, compared to the S&P 500 average of 2.95. The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Lyft 's P/B ratio of 5.6 indicates that the market value of the company exceeds its book value by a factor of 5, so it's likely that equity investors are over-valuing the company's assets.
Lyft has decent profit margins, an analyst consensus of strong upside potential, and strong cashflows, but its P/E and P/B ratios indicate an inflated valuation -- even by tech company standards. Lyft is likely fairly valued at today's prices. We hope you enjoyed this basic overview of LYFT's fundamentals. Make sure to subscribe to our free newsletter to keep abreast of each day’s market movers!