The Risk to Lyft Stock That Nobody Is Talking About

Josh Enomoto

Despite my Type A personality toward my professional pursuits, outside the office, I’m incredibly lazy. For instance, although we live in a world of profound digital technologies, I don’t advantage them. I like my routine. However, I’ll make a big exception for ride hailing. Many others share my enthusiasm, which underlines the investment case for Lyft (NASDAQ:LYFT) and Lyft stock.

While Lyft Stock has Potential, the Near-term Risks Outweigh the Upside

Source: Tero Vesalainen /

When ride hailing first hit the market earlier this decade, it was an interesting novelty. However, the concept spread like wildfire, with Uber (NYSE:UBER) taking the lead, and LYFT quickly following suit. Eventually, the two rivals went public through much fanfare and anticipation. Unfortunately for the LYFT stock price, that’s the only good news to report so far.

Since closing at $78.29 on its first trading session, the LYFT stock price quickly spoiled its chart with red ink. Although shares experienced a choppy rally into the second half of July, they eventually tumbled to where they are now. Against that first day, LYFT is down over 40%.

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However, bulls will argue that this is a tremendous discounted opportunity. Over the long haul, I agree. As I mentioned in last month’s write-up about Lyft stock, ride hailing has become increasingly popular. In 2015, the Pew Research Center reported that only 15% of American adults tried ride hailing. Today, that statistic has jumped to 36%.

I don’t find that surprising. In the past year, not only did I jump on the bandwagon, I convinced my parents and in-laws to do the same. They all loved it. But love is a quality that the LYFT stock price isn’t receiving lately.

Should you worry?

Recession Risks Cloud Lyft Stock

To answer the above question, it largely depends on your framework. As a quick long-sided swing trade, I’ll admit that LYFT stock doesn’t currently inspire confidence. Along with concerns about profitability, you also have the pressing legal issue of whether LYFT drivers are employees or contractors.

But over time, these primary concerns should fade. Regarding profitability, early critics of Amazon (NASDAQ:AMZN) blasted the e-commerce firm with similar rhetoric that we see against Lyft stock. As we know, the convenience of e-commerce converted millions of people. We see the same thing happening now because ride hailing is the future of personal transportation.

As for the latter, I sympathize with the drivers’ concerns. However, I don’t see Lyft’s issues as larger than any other company that relies on the gig economy. Drivers becoming employees would overturn the flexibility and low barrier to entry that likely drew drivers to Lyft and Uber in the first place.

So no, I’m not worried about the usual criticisms against LYFT stock. They will eventually work themselves out.

What I am concerned about, though, is the economy and how it relates to ride-hailing enterprises. If we do suffer a downturn, the incentive to hitch a ride disappears quickly.

Yes, more Americans are trying ride hailing. However, when you drill into Pew’s comprehensive statistics, you’ll notice a peculiar detail: the number of adults who use Lyft or Uber weekly has only increased slightly. Thus, the ride-hailing industry is not substantively converting newcomers.

And why is that? It probably has to do with the fact that income and ride-hailing adoption share a direct correlation: if you’re rich, you’re more likely to “ride share” — or more accurately for all but the lowest price options for Lyft and Uber, ride hail.

What happens, though, if the economy slows down? Based on the Pew data, LYFT and Uber are price-sensitive, which is problematic.

A Possible Discount Coming

I’ll reiterate my prior sentiment regarding the LYFT stock price: overall, I remain bullish on shares and the industry as a whole.

Furthermore, here’s some perspective. New innovations may take time for wider acceptance and adoption. As you know, we are creatures of habit (some of us more than others). Ride hailing, like e-commerce many years ago, is enduring growing pains.

But we all know what happened to Amazon after critics initially lambasted it. Although the concept of e-commerce was new, it was undeniably forward thinking. And with technology, we never move backwards. Thus, I’m confident that Lyft will work through its problems, in part because they already have the infrastructure in place.

Nevertheless, after reading the industry data more closely, the company might suffer a timing problem. As things stand now, both Lyft and Uber are distinctly vulnerable to any economic deceleration.

Tactically, this means that bulls may buy some shares now, but should also keep the powder keg dry. If either the economy or consumer sentiment takes a hit, LYFT could come down in a hurry.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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