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Lyft stock is ‘getting a lot cheaper here,’ strategist says

Needham and Company Managing Director Bernie McTernan joins Yahoo Finance Live to discuss quarterly earnings for Lyft, Uber, and Airbnb.

Video Transcript

AKIKO FUJITA: Joining us now, we've got Bernie McTernan. He's Needham & Company managing director. And Bernie, let's start with the stock moves, specifically on Lyft, the worst single day decline that we're seeing today, down nearly 34%. How much of this do you think is overdone?

BERNIE MCTERNAN: Yeah, thanks again for having me. Look, the problem that Lyft is going through right now is just the investment levels were a lot higher than what the Street was anticipating. Both happening on driver supply, which, I guess, we could have guessed was going to be happening, but then they also introduced new areas of investment that we weren't expecting, and some OpEx line items that are going to be going up on a sequential basis. So that's R&D, G&A, and sales and marketing expense. So, admittedly, after 33% decline in the stock, shares are getting a lot cheaper here.

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On a valuation basis, the stock is trading at less than 10 times EBITDA. The only problem is there's just a lot of uncertainty in that EBITDA estimate in terms of, A, there's a lot of pricing inflation that's supporting that revenue in those bookings numbers that the company reports, and then how much the company is going to have to invest in driver supply in other areas of the business, too, to just harvest. Again, Lyft has come out a much more profitable company.

Because of the pandemic, they are EBITDA positive. Even the 2Q guidance, which was disappointing, it is for positive. Remember, this was a company that was over $300 million loss in 2019. So the company has made a lot of strides. The markets digested that now, so it's, what have you done for me lately? And it's that the investment levels are just greater than we expected.

EMILY MCCORMICK: So, Bernie, when it comes to these investments here for Lyft, especially on the driver supply side, do you think these are the right investments to be making for Lyft to drive long-term growth, even at the expense of near-term profits?

BERNIE MCTERNAN: Yeah, it's interesting. Both Lyft and Uber, Uber pulled up their earnings call. They were supposed to report today after market close. They moved it up to before market hours, given the results that Lyft reported in the stock market and the stock reaction to that as well, too. And so, are they the right investments? It's interesting because Uber was talking about how they really think we're at a new normal here for pricing, and that getting pricing back down to pre-pandemic levels just doesn't seem like it's going to be happening over the near term.

So, you know, I think that's a major area where Lyft, you need that two-sided marketplace. It seems like Uber is there and has it. Dara spoke about some really encouraging commentary in terms of how much their drivers and earners in the platform are up year over year. They would describe a lot of that to not only the investments that they have been making over the past year to driver supply, but then also what they're doing on the technology side, too, to make just a better environment for earners to earn on their platform. So I think they would argue that Lyft was falling behind and harvesting for profits last year when they should have been investing like Uber was.

AKIKO FUJITA: Yeah, I mean, Emily called this a tale of two companies when you look at Uber specifically. I mean, they say they've had more drivers than at any point in the pandemic. Lyft is struggling a bit more. But when you look at the overall quarter, Uber still posted a loss of $5.6 billion. How do you think investors should be looking at that number, given that a big chunk of that came from their holdings in Didi?

BERNIE MCTERNAN: Yeah, so we're-- I mean, we're really focused on what the EBITDA of the company is. It's worth noting, too-- so the company is going to be generating over a billion dollars of EBITDA this year, I think. And they said they expect to get to free cash flow positive. So I think that's a metric that as we expect bookings to continue to grow in '23 and '24, the incremental margins that the company has spoken about, the 5% delivery, 10% on mobility, plus freight had a really strong quarter. This time around, corporate expenses were less than we expected.

So I think that we'll be talking about that conversion of EBITDA to free cash flow more and more, and then what the company can do to start getting some value for that cash or free cash flow generation in their business. You mentioned their minority investments. I would say that the market's probably ascribing little to no value to them. Granted, the value of those investments has really come down over the past six months. It's still worth a couple of billion dollars. So whether it's a buyback or what the company can do to really start to get value for that free cash flow, as they're really cemented this free cash flow positive, I think it will be interesting to see how that transitions over time.

EMILY MCCORMICK: And just thinking about the macroeconomic backdrop, everything else going on in the world, I'm wondering how much of a boost, if any, do you see Uber and Lyft potentially getting this quarter from the fact that gas prices in the US, at least, have started to stabilize from their March highs?

BERNIE MCTERNAN: Yeah, it's interesting. Both companies really played down the gas price impact. We have a mobility supply tracker where we measure-- we have 3,600 data points going back to Labor Day, where we're tracking Uber and Lyft against each other for pricing and wait times in the head to head match-up. And I guess, no surprise is that wait times and pricing remain elevated and back to, really, the post-Labor Day highs.

And so part of that, we've heard anecdotally, there's been articles written that gas prices are playing an impact. The companies were certainly downplaying it. And Lyft, in particular, was talking about how they're investing in driver supply because demand reacted early post-Omicron, and then it just takes longer for supply to impact. So that's where they think they're making those investments. Neither company commented that I believe that the gas surcharges that consumers are facing right now, even though they're relatively modest, they run out, I believe, in about 11 days for both companies.

So, no-- so not sure if those will continue at all either. But really, what these companies are benefiting from is just inflation on the platform, where earners are making a lot more money, and consumers are paying a lot more money for these services. And I don't think that's going to be changing anytime soon.

AKIKO FUJITA: And finally, Bernie, another stock that is moving in the other direction, we're talking about Airbnb. Really another strong quarter for them. It does feel like this company has found the right mix, whether it is for the short-term stays, the long-term stays. They've kind of been able to position themselves across the spectrum on travel and work from home. You've got a price target of $220 a share. Certainly, more upside that you see, but I wonder if we flip the question and say, what's the one thing you think that could derail the momentum for this company?

BERNIE MCTERNAN: Well, I think it is a really encouraging story. One of the major pushbacks that we get-- or two major pushbacks. Let's go there. One is valuation. The stock's trading into double digit revenue multiple. Those were commonplace for my coverage six, 12 months ago. Now I think they're the only company I cover that's still supporting a double digit revenue multiple. So I think that's an area for the bears-- their bears are focused on. I would counter that we just raised our EBITDA estimates by 13% this-- for 2022. That means that the stock's trading about 30 times their EBITDA estimate. I think that's not quite as a lofty valuation as you get when you look it on a revenue basis. So that's one.

And two is ADRs. The company posted plus 5% ADRs. In the first quarter, we had them down 1% for the year. At some point, as urban comes back, that should be deflationary towards ADRs. So we had them falling off again in '23. I think that's something where bears are focused on. And maybe the third area where bears are focused on is supply. And that's especially coming off Expedia's earnings call earlier in the week when they said VRBO was supply constrained to an extent.

On the positive side for Airbnb, they said they are not supply constrained. That's the volume and diversity of their supply on their platform, plus the innovations that they have. They called out this I'm Flexible feature, which I've explored. And it's actually pretty cool, but it has been used over 2 billion times. But the point of it is that they can move supply from constrained areas to less constrained areas. It really helps their utilization rates on the platform. So those are the three areas that the bulls are-- or sorry, that the bears are focused on and kind of my rebuttal. So, sorry, I didn't really take the bait there, but those are the areas where the bears are focused.

AKIKO FUJITA: Yeah, the stock today up about 1.7%. Bernie, it's good to have you on today. Bernie McTernan, Needham & Company managing director. And our thanks to Emily McCormick as well.