Lyft Is Down on a Torrential Waterfall of Losses

FAN Editor

On today’s MarketFoolery, host Chris Hill and Motley Fool analyst Bill Barker chat about the market’s biggest stories. Shares of Lyft (NASDAQ: LYFT) fall after the company reported it lost about $1 billion in its first public quarter. In other news, Match Group (NASDAQ: MTCH) hits an all-time high on yet another stellar quarter, yet again cementing its place as the top dog in a very lucrative market. Wendy’s (NASDAQ: WEN) and Papa John’s (NASDAQ: PZZA) are struggling, for different reasons. At least Papa’s might have some brighter days ahead, if the rumors pan out that Papa Schnatter might sell his stake.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on May 8, 2019.

Chris Hill: It’s Wednesday, May 8. Welcome to MarketFoolery! I’m Chris Hill. Joining me in studio, from MFAM Funds, the one and only Bill Barker. Thanks for being here!

Bill Barker: Thanks for having me!

Hill: We’ve got restaurant earnings, we’ve got Match Group hitting an all-time high. We’re going to start with Lyft issuing its first report as a public company. It’s a memorable one because Lyft lost a billion dollars in the quarter. The company says that this will be its peak year for losses and that it sees a clear path to profitability. Boy, I really hope so, because they just lost a billion dollars in 90 days.

Barker: Yeah, I think that that is not easy to do.

Hill: Yes.

Barker: Despite the headlines today about one of the leaders of this country having lost $1 billion, that took him 10 years.

Hill: Right. Not 90 days.

Barker: Not 90 days. He couldn’t do that. Although he did it three times, but that’s another story.

Hill: That’s another story.

Barker: They projected an EBITDA loss for $1.152 billion to $1.175 billion. That’s a rather specific range, fairly tiny range, given the size of the loss. It’s like a 1% delta between the high and low of that range, on $3.2 billion to $3.3 billion in revenue. You’ve got a competing stories here. One, extraordinary growth at the top line, I think 95% year over year revenue growth for the quarter. And, staggering losses. The market today has resolved that by selling off the stock.

Hill: Right. Worth remembering that — and it’s not hard to remember because it was just, I don’t know, a couple of weeks ago — that Lyft went public at $72 a share. With the sell-off today, it’s at $55. There is a price at which this stock becomes attractive, I suppose. Is the mid-50s where it is? All kidding aside, that’s what I was struck by. It was not that they lost a billion dollars, it’s that they did it in 90 days. I don’t even know how you begin to do that. It still feels like this is much higher than I would want it to be before I put Lyft on my watchlist.

Barker: OK, well, in saying that they lost $1 billion over 90 days, that is true, but misleading in the sense that a lot of it was related to stock option expense and the costs associated with going public. What they lost on an operational basis was about a quarter of that billion dollars, $1.1-$1.2 billion they’re going to lose for the year. Still, losing $250 million on your operations… $776 million was the revenue, and they’re losing one-third of that in operations. So, I think that they’re obviously not an attractive stock to a value investor, who would want to see profits. In terms of the growth investing public, it doesn’t have any momentum stock investors interested in it because it goes down every day. That’s not the kind of momentum, unless you’re a short seller, that you’re looking for. So, you need to have that “all this top line growth is going to translate to profits at some point.” When is that going to be? They’re talking about a clear path to profitability. But Uber is going to be a well-capitalized company as of Friday and can fight them as to who can lose more money quickly in pursuit of customers.

Hill: Uber has set the range for their IPO at $44 to $50. I’ve said before, I think that’s both smart of them and probably a response to what happened with Lyft’s stock right after they went public. Among other things, Uber is looking to get in, if not the good graces of Wall Street, certainly the better graces of Wall Street relative to Lyft.

Barker: Yeah, and they are going to be judged through the relative-to-Lyft prism. As they should be, because it’s a direct competitor, and Uber is in a few more areas of business. Uber Eats is a more attractive part of the business, and some other parts of the business. Yeah, they have to, at this point, somewhat defend themselves from the market reaction that has befallen Lyft, and say why they should be valued at the top of the range rather than the bottom or below. There are enough fast-growing companies which have clearer paths to profitability than the one that Lyft is demonstrating so far.

Hill: Beyond Meat, perhaps, could be one of them.

Barker: Uh, perhaps. [laughs] You’ve spent some time looking at that one. What do you think about their profits?

Hill: Well, they don’t exist at the moment —

Barker: Their path.

Hill: Oh, the path. I think the path is looking pretty good for plant-based meat substitutes.

Barker: All right, and that path is looking good for transportation-as-a-service. The question is, is the profitability of that attractive? You’re going to have a couple of more shifts in the business model. The business model right now, rapid growth but no profits. You’ve got a lot of people you have to pay and you’ve got to compete on price against somebody else who is willing to compete with you on price. And you’ve got to displace all the cabs. The shift is going to come, of course, when autonomous vehicles become a reality. Then maybe you can take your costs down quite a bit. But those autonomous vehicles are going to have to be owned by somebody. Are they going to be owned by Lyft, are they going to be owned by third parties, are they going to be owned by the car manufacturers? It’ll be interesting to see how that plays out. But it’s very hard to model, in my estimation, what this is going to look like in five years.

Hill: One more factor at the moment that is not working in either Lyft’s favor or Uber’s favor is the current unemployment situation in America. Lowest unemployment in close to 50 years. That makes it a little bit harder for them.

Barker: It does. It means a lot of people are getting to work. They need Lyft to help them get to work, some of them.

Hill: Yes. But in terms of the employees, the actual drivers. As you said, they don’t have the autonomous vehicles just yet. When you have the autonomous vehicles, you care a lot less about what the employment picture is in America. At the moment. you’ve got a lot of people who maybe would be considering signing up as an Uber or Lyft driver part-time, maybe on the weekends, some sort of side hustle, and they’re like, “No, I’m good.”

Barker: Yeah. And some of them work for Uber and Lyft. A lot of the employee situation is — and they’re not all employees, they’re contractors — it’s a complication. I think that they have to spell out when the profits come and in what form in order for people to be more interested in the stock, which is not responding well to today’s story. An impressive top line story, almost doubling revenues in a year. But that’s not the whole story. Where are the profits? What are the margins going to look like when this thing is at scale?

Hill: Let’s move on to a couple of restaurants. Wendy’s and Papa John’s both reporting first quarter results. Same-store sales in the U.S. for Wendy’s, barely in the positive range, just 1.3%. I will say, though, that’s not completely out of line with what we’ve seen from the bigger burger chains. That’s basically in between what we’ve seen recently from McDonald’s and Burger King. Papa John’s same-store sales in North America down nearly seven 7%. I guess the bright spot for Papa John’s, because the stock is up a little bit today, is that overall sales came in better than expected.

Barker: Yeah, Papa John’s is continuing to suffer from the damage to the brand from the actions of John Schnatter, both his public proclamations — or, not public, they became public over a year ago now — and then suing the company and his being ousted and sorting out, what does Papa John’s look like once Papa John himself is completely out of the company? Which seems to be coming, as the reports today also include indications that Schnatter, who has no operational role with the company, is thinking of selling his very large stake, which I think is around 31% of the company. But they’re forced now to pay back their franchisees. They’re lowering their franchisees fees because of the damage to the brand; the franchisees having made their investments in running these units. The company is not wise to spend a lot of money on advertising right now while it’s sorting out what kind of a message it’s trying to put out to people. They’re putting out Shaquille O’Neal as the big reason to be happy about the company right now.

Hill: They are. Although they’re also doing some pretty smart promotions featuring local franchisees, basically dropping the John’s and just being like, “Oh, here’s your local Papa, here’s the person who runs a bunch of franchises in your area.” I think that’s smart. I think in the case of Papa John’s, this was slightly more good than bad, slightly more optimism in this report. To some degree, that is, as you pointed out, absolutely helped by the reports that Schnatter might finally be looking to unload his stake in the company. Run well, this is a good business to be in. People like pizza, and if you can do a decent job of actually making the pizza and getting it to them, that’s a profitable business.

Barker: Yeah. I guess they prefer pizza that comes without controversy.

Hill: Yes.

Barker: There are so many choices of pizza that are non-controversial pizzas. Many people find pineapple on pizza to be controversial, but they don’t have to get pineapple on their pizza. When you’re going to Papa John’s, you’re just buying into controversy at the moment.

Hill: Right. And most places in America, whether it’s a big city or a small town, you’ve got options when it comes to pizza. There are a lot of local places that do it.

Barker: Yeah, or you can go over to Wendy’s and get a burger.

Hill: You can, although apparently fewer people are doing that.

Barker: They’re still showing up. What were the same-store sales, around 1%?

Hill: Yeah, 1.2%.

Barker: They’re doing OK. There’s nothing exciting about the report. They’re opening and shutting restaurants at about the same pace. I think they had 43 total global new restaurants. I think they closed one more than that. Systemwide sales are treading water. 1% same-store sales, it’s OK. Nothing special. It’s stable, burgers. They’re working on upgrading their menu. That’s a thing. I think they were pointing to the asiago cheese and applewood smoked bacon elements that you can get with your burger.

Hill: But I don’t get the sense that Wendy’s, on a systemwide level, is doing the same type of investing the you and I talked about recently with McDonald’s, the investments that McDonald’s has made in kiosks. Again, it’s all geared toward the same thing, which is, how do we increase throughput? How do we get more people through the line in an hour than we have been getting? How do we raise the average ticket price? And in the case of Wendy’s, it seems like they’re focusing on one but not the other. It really seems like they’re focused on, if we can sell some more premium items — and they’ve said that — then that’s their pathway to increasing the average ticket price. I don’t get the sense that they’re making investment to really boost the throughput in the way that McDonald’s is.

Barker: No. The investment seems to be in their Twitter account.

Hill: Do they have a strong Twitter?

Barker: They do have a strong Twitter. Are you unaware of that?

Hill: Apparently I am.

Barker: Yeah, they’re pretty good.

Hill: OK. Well, let me know when that translates to higher throughput. That’s great from an entertainment standpoint, but that’s not showing up on the balance sheet, as we like to say.

The stock of the day is Match Group. Match Group is the parent company, of course, of match.com, OK Cupid, chemistry.com — which is a dating site, not a science site, I actually checked that out — and Tinder. First quarter report was fantastic. Profits were up, revenue was up, subscribers were up. Shares of Match Group are up 12% and hitting an all-time high.

Barker: Yeah. This is a force. It’s largely due to Tinder. They’ve got a lot of different brands but Tinder is most of the story about what is going on in terms of the massive profitability that is growing there.

Hill: Well, and you and I were talking earlier today, neither of us have used these apps. We met our wives —

Barker: Back in the old days.

Hill: — back in the old days, before there were apps. But, as you pointed out, if Match works out for you, then you’re leaving. [laughs] There are probably half a dozen or so people here at The Motley Fool who met their spouse through match.com. Tinder, however, is not so much about, “I’m looking for someone to spend the rest of my life with.” Tinder is much more, “I’m looking for someone to possibly spend the night with.”

Barker: Right. Just purely from an economics perspective, repeat customers are better than one-offs. All the other elements that they have — they have a lot of different ways that they are hooking people up, whether it’s for lifetime matches, or, they’ve got it segmented by age, there are different brands around the world, some that are targeted at racial groups. A lot of them are about finding your lifetime partner or longtime relationship. They’re categorized as higher relationship intent, is how they refer to Match or to OurTime, and things like that. Tinder is not about long relationships. Therefore it is more of a model where you can satisfy people by finding new opportunities constantly, and expanding the ways in which the company does that. All of this is to say, I think it’s a good thing that we’re talking about this today rather than during Apropos of Nothing, where we might — or you, probably — might work a little more blue on this topic.

Hill: [laughs] We don’t work blue on Apropos of Nothing!

Barker: We lace Apropos of Nothing with some alcohol.

Hill: Yes?

Barker: Which tends to increase the chances of ending up in territory that’s a little bit blue.

Hill: No. This is a clean show.

Barker: Yeah, no, absolutely, this is. As well as the Apropos of Nothing, to be honest. It’s just, you’re working with kindling there.

Hill: There is a little bit more kindling in the form of some high-level alcohol. Let me go back to the actual investing for a second here. I think something that often gets overlooked with Match Group is InterActiveCorp, IAC. IAC, headed up by Barry Diller, who has a great track record when it comes to media entertainment, and I would throw social media in there as well, IAC owns a big chunk of Match Group. So it’s not just shares of Match Group that are hitting an all-time high today. IAC is also up. Not as much, up about 5%. But that’s also hitting an all-time high.

Barker: Yeah, they do own that. A few other things, they own Angie’s List and all that stuff.

Hill: IAC has a very big portfolio.

Barker: Although Match Group is a very large chunk of it at this point. The nice thing about Tinder is that people are likely to be customers for a fairly long time and you can get people to pay more and more and more as it becomes more successful at finding the kinds of Tinder matches that people are looking for. The economics of that are just looking extremely good, in terms of the revenue growth, the company’s compounding it over 150% over the last three years.

Hill: Unlike Lyft, they’re actually profitable.

Barker: They are profitable. And that is one of the differences between this and many other software, cloud-based services where the scale involves, you’re not having to employ massively greater numbers of people to get massively greater numbers of service done. You’ve got network effects as well that are very attractive. The more people who are using Tinder, the more you want to be using it, because there are more choices for you. And then they’ve got all their super likes and boosts and things like that, which are increasing the addictive nature of the property.

Hill: One more thing I’ll just add in terms of the business is, unlike Lyft, which has a direct competitor in Uber and vice versa, I’m not really sure who the Pepsi is to Match Group’s Coke. I mean, I suppose it’s eHarmony. I don’t know how many properties eHarmony has beyond its signature one. In this industry, it feels like this is Match Group’s world and all other competitors are living in it.

Barker: Well, yes. They have most of the best known names. I think that Bumble is a reasonable competitor and is attractive to more of the female-focused generating the contact model. That has gotten off to a good start, but it’s way, way behind Tinder.

Hill: Last thing before we wrap up. As you touched on, coming this weekend in your MarketFoolery feed will be a bonus episode, an Apropos of Nothing, which we’re going to be taping tomorrow, on Thursday afternoon.

Barker: It’s not too late to get topics in. We need some.

Hill: That’s true. A couple of people have emailed marketfoolery@fool.com, suggested topics. For those relatively new listeners who are thinking to themselves, “What are they talking about?” Apropos of Nothing is something we’ve done a few times where we get in the studio, and we don’t really talk about anything to do with investing or business or that sort of thing. It’s just talking. It’s the two of us and a third person. Bill Mann has been here for this; Mac Greer, Robert Brokamp. We’re going to dragoon one of our colleagues into this tomorrow afternoon. It’ll come this weekend. And, as I always like to say, you don’t have to listen. That’s why we put it as a bonus episode. We want to keep the promise of, no, we’ll be here Monday through Thursday with business news and investing takes. But every once in a while, on the weekend, we’re going to drop an Apropos of Nothing, and it’ll be long and it’ll have nothing to do with investing.

Barker: We’re going to have a bottle of something open during this, right? Are you providing?

Hill: Yes, I will provide.

Barker: Actually, MFAM is sponsoring the alcohol.

Hill: Really?

Barker: Yeah.

Hill: Well, I hope you’re not expecting any sort of promotional consideration because you won’t be getting any.

Barker: MFAM Funds will in no way be getting any mention during the podcast?

Hill: Not on Apropos of Nothing.

Barker: Perhaps this one?

Hill: I’ll just say, if you want to read more from Bill Barker and his colleagues at MFAM Funds, you can go to mfamfunds.com and sign up for Declarations. It’s the free monthly newsletter. First of all, it’s free. It’s free, people! It comes in once a month, which is the thing that I like about it, because it’s not clogging up my email box. It just comes once a month. And it’s really smart stuff about investing. So check that out when you get a chance!

Barker: This will be the first time that MFAM in its sponsorship of Apropos of Nothing will be at $1 billion — or more, actually — in funds under management.

Hill: Nice. You know who might want to talk to you about that AUM? Lyft.

Barker: Yeah, hmm. Hmm.

Hill: Bill Barker, thanks for being here!

Barker: Thank you!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. That’s going to do it for this edition of MarketFoolery! The show is mixed by Dan Boyd. I’m Chris Hill. Thanks for listening! We’ll see you tomorrow!

Bill Barker is an employee of MFAM Funds, a separate, sister company of The Motley Fool, LLC. The views of Bill Barker and MFAM Funds are not the views of The Motley Fool, LLC and should not be taken as such. Bill Barker has no position in any of the stocks mentioned. Chris Hill has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Match Group and Twitter. The Motley Fool has a disclosure policy.

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