Heavy Lyfting

by Dan August 26, 2019 2:52 pm • Trade Ideas

LYFT was upgraded today at Guggenheim from Hold to Buy, on their belief that a more rational competitive landscape with Uber should allow LYFT to reach profitability sooner than expected, per CNBC.com:

“We all underestimated how quickly the competitive mindset might shift under public ownership and how much leverage there is in the model to pricing,” Guggenheim analysts Jake Fuller and Ali Faghri wrote in a note to clients Monday.

“LYFT and UBER are now public, and UBER needs margin from U.S. ride hail to support efforts internationally and in the highly competitive restaurant delivery business,”

“Price increases should stimulate take-rate, bolster contribution margin and yield narrowing losses, with the potential for upside to consensus across key metrics,”

When the company reported their Q2 results on August 7th, only their second earnings report as a public company, the stock immediately shot up 10% in the aftermarket near $66 (red circle below) on an unexpected beat and raise, per Barron’s:

But the stock quickly reversed during the conference call and started what would amount to about a 22% decline to today’s levels on the disclosure that the company was moving up the expiration of the first share lockup from the IPO to Aug 19th from what would have been late September. The chart below since the IPO shows the stock on Friday holding its $48.15 closing low on May 13th.

Technical support is tenuous at best as it flirts with the only line that keeps the stock with a 5 handle in front of the hope that Wall Street analysts and investors get more optimistic about the prospects for a deeply unprofitable company like LYFT to have some sort of seachange prior to 2022!?!

First things first, let’s get a handle on the expectations… consensus estimates on a GAAP basis see losses for as far as the eye can see…

On an adjusted basis consensus sees breakeven-ish ion 2022:

which equates to its first meaningful adjusted net income gain in 2023:

all of this coming on expected year over year revenue increases that decelerated from 28% in 2020 to 21% in 2023, on revenue totals of $3.5 billion in 2019 to estimated $8.5 billion in 2023:

Just to put that revenue growth in perspective, Twitter’s (TWTR) first full year as a public company in 2014 it had $1.4 billion in sales and is only expected to hit $3.5 billion this year:

2014 was also the first year that TWTR had positive earnings on an adjusted basis, but it just in the last two years where the company is showing leverage in their earnings model with 100% eps gains:

And it hasn’t been an easy road for TWTR stock that came public in late 2013 at $26 a share, with an average price since then of about $31 and at its lows in 2016 down 50% from the IPO price:

Make no mistake, the jury is still out on TWTR as a meaningfully profitable public company, the stock’s recent success (up 43% ytd) is a result of the company doing a better job of monetizing the users they do have, not by substantially growing them. If monetization slows, and user growth does not reaccelerate this stock will be headed back to $30 in the coming year.

So back to LYFT, the company’s path to profitability and the pace at which they get there will determine whether or not the stock trades above its $72 IPO price anytime soon.

The next identifiable catalyst for LYFT shares will be there Q3 results that are expected in mid-November.

Short-dated options prices remain elevated, one reason for that is the uncertainty around the float post lockup, another, of course, is the stock’s volatility … the chart below shows 30-day at the money implied volatility (the price of options, blue line) which has come in considerably since its earnings print, but above 50% is fairly high for a stock with a $15 billion market cap. But the white line below, realized volatility at 47% and rising shows how much the stock is moving, possibly justifying the high price of options in the name.


So what’s the trade?

There are a couple of trades structures that come to mind for those looking to be constructive on the stock at what might be a double bottom low.

First a call calendar, looking to take advantage of the high cost of short-dated out of the money calls and looking to use the proceeds from selling them to help finance longer-dated calls… for instance… if I thought the stock might be range-bound given the overhang of the IPO lockup, but possibly rally out of their Q3 earnings in Nov, I might consider the following call calendar:

Bullish Trade Idea: LYFT ($51) Buy Oct / Jan 60 call calendar for $2.30

-Sell to open 1 Oct 60 call at $1.10

-Buy to open 1 Jan 60 call for 3.40

Break-even on Oct expiration:

The ideal scenario is that LYFT stock is near 60 on Oct expiration and the short 60 Ocvt call expires worthless or can be covered for a small amount and you are left long Jan 60 call for $2.30 or about 4.5% of the current stock price.

The max risk of the trade is $2.30 on a sharp move lower than current levels or a sharp move above the $60 strike price.


If I were long the stock, possibly from higher levels, or if I were long down here I might look to overlay (buy) an out of the money 1×2 call spread to my long position potentially add yield and leverage, for instance…

vs 100 shares long of LYFT ($51) Buy Oct 55 / 60 1×2 call spread for 20 cents

-Buy to open 1 Oct 55 call for $2.40

-Sell to open 1 Oct 60 puts at $1.10 each, or $2.20 total

Break-even on October expiration:

Profits of the stock up to $60, but if the stock is 60 or high you have effectively sold the stock at 65 (the short call strike plus the $5 wide 55/60 call spread’s 5 in premium, less the 20 cents cost to buy the 1×2 call spread)… think of it as overwriting 100 shares of stock but also adding a 5 wide call spread between 55 and 60.

Losses of the stock below current levels, basically adding 20 cents of risk (the cost of the 1×2 call spread), but limiting the profit potential above 65 between now and October expiration, up $14 or 33% from current levels.


ICYMI last week on CNBC’s Fast Money I had some comments on LYFT as I think it is a unique way to play what is very likely to be a massively disruptive technology as transportation as a service moves closer to autonomy: