Stocks to sell

Down more than 70% in the past year, Lyft (NASDAQ:LYFT) may be starting to look appealing for bottom fishers. Check out commentary on LYFT stock online. You’ll see articles suggesting it’s a bargain after falling to levels well below its IPO price. For instance, a recent piece by Barron’s names it as one of several “busted IPOs” that may now be a value play.

On the surface, the ride-hailing app operator may look undervalued. Analyst forecasts call for the long-unprofitable company to report 30 cents per share in earnings this year, and $1.10 per share in earnings in 2023. Not bad for a stock trading near $15.

But you may want to take these forecasts with a grain of salt. Challenges on the revenue and cost side could make delivering such results difficult. In turn, a recovery for shares may prove elusive.

LYFT Stock Is Far From a Smooth Ride

In the past 12 months, two factors have played a role in sending Lyft shares down to rock-bottom prices. First was the market selloff among tech and growth stocks. This was due to rising interest rates and increased concerns about future economic growth.

Second, however, was its poorly received Q1 2022 earnings report, released back in May. Reporting a 10% sequential (quarter-over-quarter) drop in revenue, Lyft also walked back its outlook for Q2 2022 and announced plans to increase spending in order to attract drivers. In today’s labor market, would-be drivers for ride-hailing apps are finding better employment opportunities.

LYFT stock had already experienced an extended slide prior to May, but the Q1 earnings release is what sent it off a cliff. Shares fell from the low-$30s to the low-$20s due to this event alone. They have continued to hit new lows since.

The most recent results and guidance not only help to explain why shares have fallen so much. They also signal it’s going to be far from a smooth ride when it comes to lifting the company out of the red and into consistent positive earnings.

Many Challenges Will Hinder Its Ability to Deliver

It’s not just me that is looking at earnings forecasts for LYFT stock with a critical eye. Analysts have already started to walk back their numbers. The company next reports quarterly results today, on Aug 4. Assuming its numbers again fall short of expectations, we may see average earnings estimates for 2022 and 2023 make another move lower.

Still, the sell-side could continue overestimating how much Lyft improves its bottom line over the next 18 months. Why? There are challenges on the revenue side and on the cost side. These challenges will likely hinder its ability to deliver earnings sufficient to move the stock beyond its current trading range.

Revenue growth (or the lack thereof) stands to continue being an issue. A recession could curb demand for ride-hailing services. There’s also the growing difficulty of attracting and retaining drivers. This is not only because wages for standard W-2 employment have gone up.

Soaring gas prices are also calling into question the benefits of sticking with a Lyft driving gig, in lieu of other job opportunities. Ride-hailing operators will likely end up having to further increase driver pay, either through higher fares, or by giving them a larger cut of rider fares.

Bottom Line on LYFT Stock

Riders are looking to spend less. Drivers are looking to be paid more. Put simply, Lyft is caught in a bind. To make matters worse, its pricing practices are currently under scrutiny, due to an antitrust suit filed in California. As InvestorPlace contributor Stavros Georgiadis wrote on July 13, ride-hailing drivers are accusing the industry of price-fixing.

The results of this lawsuit could signal that greater transparency may be coming to the ride-hailing space. With riders and drivers less in the dark when it comes to fares, increasing margins will be even harder to achieve.

Considering all factors, it’s hard to see this company’s operating results materially improving in the quarters ahead. That also makes it questionable that LYFT stock will make a comeback, after its collapse in price. With this in mind, it’s best to avoid shares now.

LYFT stock earns an F rating in my Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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