Lyft is seeing ‘a solid trajectory of recovery’ for ride demand: analyst

Tom White, managing director and senior research analyst at D.A. Davidson, discusses Lyft’s first-quarter results, which showed some signs of recovery amid the pandemic, as well as an Uber preview ahead of the company’s earnings release.

Video transcript

MYLES UDLAND: All right, welcome back to Yahoo Finance. Let's take a look at shares of Lyft. They're trading slightly lower here in the early going. Stock had traded up last night, following the company's quarterly results out after the bell on Tuesday. Company coming in with better than expected results on the top line there. Let's bring in Tom White. He's an analyst over at DA Davidson covering Lyft, to talk a little bit through this quarter.

And Tom, I guess just start with your first impressions on where you see the business now. And I guess, kind of, how are you thinking about Lyft, you know, in this COVID turnaround kind of moment it was forced into, and then thinking about the ridesharing business and, you know, broadly and where that trajectory you think is now headed, you know, given what's happened in the economy last year.

TOM WHITE: Yeah, so, first off, thanks for having me. Good morning. Look, you know, I think we thought the quarter last night was pretty good, quite good, in fact. You know, this is a company that is dealing with a lot of dynamics and variables that are sort of outside of its control, related to the pandemic, and decreased demand for mobility. But the company is controlling the things it can control. It's executing well. And, you know, the good news is that on the demand side for rides, there's a nice, solid trajectory of recovery here. Ride volume improved every month during the quarter with the steepest improvement in the month of March.

And the company is doing a good job controlling costs. I think the stock, you know, may be waffling a bit here this morning. You know, we've heard from some investors a little bit of grumbling around kind of the quality of adjusted EBITDA. You know, one of the big headlines from last night is that Lyft is saying that they can get to adjusted EBITDA profitability by the third quarter. But some investors are maybe taking issue with some of the kind of adjustments or how to get to that number.

And then also there's another headline this morning. It just hit the tape on the Labor Secretary in the Labor Department kind of doing some saber rattling around the classification of gig workers, which I think is maybe putting a little bit of pressure on shares of Lyft. I think I saw Door Dash down also this morning.

BRIAN SOZZI: Tom, let's stay on the profitability aspect. Lyft's co-founder told me-- to your point, he said, we still plan to be adjusted operating profitable in the third quarter. And that's good. They reiterate that language. Do you think Lyft can sustain its profits into the fourth quarter of this year and into next year?

TOM WHITE: Yeah, so near term, I think that they've got a very clear line of sight at hitting and maintaining adjusted EBITDA profitability. So you asked about the fourth quarter. I think if they hit it in the third quarter, they'll be able to get there in the fourth quarter, too. The bigger risk to, I think, longer term profitability for these guys is increased regulation and labor classification probably being the biggest issue.

You know, on the positive side, I don't think we're going to get a clear resolution or a dramatic shock to the business model on that front any time soon. It's going to take a long time to play out and very well could kind of be settled on a market by market basis. So it's going to take some time I think for that to sort of crystallize. But long term, that's the risk that-- I wouldn't say whether or not they can maintain EBITDA profitability, but I'd say sort of the magnitude or the level of that profitability.

I think worst case, if they had to reclassify all drivers as employees, what you're going to see is Lyft basically just hike prices. And that will significantly shrink the size of the business. But I don't think it would prevent Lyft from being able to be cash flow positive. It would just be a much smaller business because ridesharing would be more expensive. And it sort of wouldn't appeal to as many consumers.

JULIE HYMAN: Tom, that's interesting. It's Julie here. So whether you're talking about Lyft or talking about Uber, which reports after the bell, how do you model that in then when it is still so uncertain? Do you just kind of wait and see what the various countries, jurisdictions, or whatever it may be, decides on this?

TOM WHITE: Yeah, look, it's tough. I mean, I think that's sort of where the art, as opposed to the science, of trying to cover these dynamically growing and rapidly evolving companies comes into play. As I said, the timing of it is really hard to predict. So it's hard to say precisely. And, you know, there are certain states going to require reclassification in a certain quarter or anything like that.

But I think you've got to look at your long-term forecasts and also the multiple that you apply to those forecasts and, in a way, whether or not you're adequately factoring in those risks. So, yeah, it's a challenge, but as I said, here, over the near term, next 12 months, which is generally kind of how we set our price targets and our ratings, you know, we see relatively low risk to numbers because of this. But it certainly could kind of weigh on sentiment, as it relates to kind of headline risk and whatnot.

BRIAN SOZZI: And Tom, Lyft calling attention to the worker shortage, which, in turn-- or the driver shortage-- which, in turn, is raising prices. I imagine Uber will say the same things on its earnings calls. At what point do riders simply not use the service because prices are too high to take them where they need to go? And that hits riders in sales and profits for these companies.

TOM WHITE: Yeah, well, so, you know, the good news is that it looks like we won't get to that point. You know, there was a spike in rider demand kind of January and February. And it was clear, I think, at least for Lyft's business and we think probably the same for Uber as well, that kind of in mid-February, it was clear that they were short on driver supply. Consumers didn't really take an issue with higher prices. It didn't seem to impact ride volume all that much.

And so Lyft benefited from-- sort of had a revenue benefit from that higher-- those higher prices. What they're going to do is they're going to kind of plow that revenue benefit into more incentives for drivers to try and attract them to the platform. That increased supply should, you know, bring down wait times, bring down prices. And hopefully, we'll get to this sort of equilibrium point, if you will, in the marketplace where riders will not see high prices, will not see these really long wait times. But that's something to keep an eye out on here for the next couple of months.

MYLES UDLAND: All right, Tom White, senior research analyst over at DA Davidson. Tom, great to get your thoughts this morning. Thanks for jumping on.