Why Lyft May Be Headed for a Recession

After losing around three-quarters of its market value last year, Lyft is hoping to rebound in 2023.

The company has made a number of changes, including new leadership, and is focusing on expanding its business beyond ride-hailing. Lyft is also working to improve its relationships with drivers and passengers.

Although 's shares have risen sharply this month, a closer look at the company's fundamentals suggests that this rebound has not yet been earned.

Lyft has been outperformed by its more global competitor, Uber Technologies, in the past.

Lyft is not suddenly gaining ground. In an initiation report in early January, Jefferies analyst John Colantuoni estimated the ride-hailer ended last year with around 29% U.S. market share to Uber’s 71%. His estimates show Lyft exiting the pandemic in arguably worse shape than it entered it, having lost around 3 percentage points of market share over the last three years.

RBC's latest driver supply analysis shows that Lyft's rider-cost-per-hour has declined by 15% in the 10 largest US markets, while Uber's has increased by 7%. Analyst Brad Erickson attributes this to Lyft's attempt to regain market share through discounting.

A global recession could have a negative impact on the ride-hailing industry. According to data from Jefferies, airport rides are the biggest use case for ride-hailing services in terms of miles driven. If companies reduce business travel budgets and consumers cut back on leisure travel, this could lead to a decline in demand for ride-hailing services. Rides to and from restaurants and bars are the second highest use case for ride-hailers – if consumers reduce their spending on going out, this could also have a negative impact on the industry.

Lyft has said that its focus on ride-sharing will eventually make it more successful than Uber, which also delivers food. However, there are some extra costs that Lyft incurs which are not faced by Uber. According to an analysis by Jefferies, insurance costs last year made up nearly 27% of Lyft's revenue, while Uber's insurance costs were only 9% of its revenue.

There are two reasons for this difference, according to Jefferies: first, vehicle insurance is more expensive in the United States than it is in other countries, where Uber does a lot of its business; second, it is more expensive to insure a car that carries passengers than one that only delivers food.

U.S. auto-insurance costs have been rising due to inflation and interest-rate increases. According to the Consumer Price Index, motor-vehicle insurance premiums grew by 4% in January 2022, but by December, they were 14% higher. This trend is likely to continue in the coming year.

Lyft's smaller scale might mean less cash to pay drivers. Gig-economy drivers can work for more than one platform at once but probably favor rides from the platform that pays the most. RBC's data shows Uber's bookings per hour came out about 17% higher than Lyft's across the 10 major markets it analyzed, with the gap having widened in recent months. The firm warns such structural disadvantage on the driver's side could lead to long-term share loss for Lyft.

It looks like traders are simply hedging their bets with Lyft's share gains this month. According to FactSet, Lyft's short interest peaked around the end of October. The subsequent decline in short interest suggests that traders are buying up shares ahead of Lyft's fourth quarter earnings report, which is due next month.

Lyft's stock is now fetching around nine times enterprise value to forward earnings before interest, taxes, depreciation and amortization. Although Uber's shares command 20 times on that basis, Lyft's stock still looks relatively cheap at first blush. However, when stock based compensation expense is added back in—which is higher on a percentage basis in terms of revenue than almost all of its internet peers—Lyft's shares actually start to look overheated.