As vaccination rate increases, Delta variant shouldn’t have an impact on Lyft as: analyst

Morningstar analyst Ali Mogharabi discusses Lyft’s second-quarter results, which topped estimates amid improving mobility trends as vaccinations picked up in the spring, as well as his outlook for the ride-sharing space.

Video transcript

- All right. Welcome back to Yahoo Finance. Live lift out last night reporting better than expected. Revenues also reporting adjusted EBITDA of profitability for the first time that coming in.

About a quarter or two, sooner than the Street had expected. We see here on the left side of the screen, however shares now of some 7% in early trading. Joining us now to talk a little bit more about the quarter and the outlook for the business Ali Mograhabi, Senior Equity Analyst over at Morningstar Ali.

Thanks for joining us this morning. Let's just start with your impression when you saw that adjusted EBITDA profitability, which, of course, has been much talked about with Lyft. And we'll see what happens with Uber this evening. But seeing that number come in, what were your first impressions of that?

ALI MOGHARABI: Well, yeah, actually, I mean, basically, it was somewhat expected after you initially see that top line growth, which was very impressive. So that revenue, that top line-- impressive top line growth creates that operating leverage for these guys.

And then on top of that, what we've said historically about Lyft and also Uber is that they have this network effect competitive advantage, which means that as demand increases, more writers come on board. And of course, as more writers are available, to keep time making the request possible and also to a certain extent the prices will decline, which attracts additional writers.

So what we're also seeing in this case in terms of helping the adjusted to the dollar is that the cost of acquisition for the writers is actually decreasing. And we saw that in sales and marketing as a percentage of revenue. So you put those together. And yeah, of course, you see the year just ended up being positive for the quarter.

- Is the reaction today we're seeing the stock price Ali that the market just doesn't believe that Lyft could be sustainably profitable for the rest of the year as the Delta variant spreads impacts the economy? And perhaps and a lot of sense-- a lot of folks not to lift cars, but back into their homes.

ALI MOGHARABI: That-- that could be part of it. Also, the economic-- one of the economic indicators that went out today. The ADP-- ADP employment numbers that was a little bit disappointing.

But keep in mind. Yoy know, management did say or the company did say that in July, not only the supply of drivers was up significantly or continue to increase, but also demand on the lighter side continue to increase. And we're talking about July. Not a month after Delta variant came out there.

So in-- in our opinion as vaccinations increase, we don't think that the Delta variant is necessarily going to have a significant impact on these guys. And it's again, the July numbers indicated.

So we're pretty comfortable where we're at. And we're valuing the company at 63 a share. We still as-- as-- as we published last night. We still think that if we recommend for the investors to wait for a wider margin of safety. And it looks like it's moving towards that.

We're probably recommending the stock at around the high 40s. $48, $49 a share. That's where we think that the stock becomes attractive.

- And Ali, what do you make of management's commentary last night about the wait times that we've discussed it here on the program? Anecdotally, of course, everyone that you know can give you a complaint about waiting for a Lyft, or an Uber, or how much it costs.

And were you surprised by how much management kind of discussed those challenges at length? That was sort of bracing for them to say, you know, actually everything's fine. But for them to come out and talk about less than ideal pricing at least in my mind was a bit of a surprise.

ALI MOGHARABI: Yes. It was a surprise to a certain extent. However, again, if you look back to the previous quarters, you actually did notice that on the supply side or the number of drivers, if they were facing shortages.

And that's very similar to Uber. So when they're not that many drivers out there, of course, the wait time increases, the prices increase to a certain extent because of that lack of balance between the supply and demand.

So you know, we expected the management to-- to at least point to that focus on that a little bit. And they did of course, also mention that they will continue to-- to spend a little bit more to continue to attract the drivers onto that platform to basically balance out the demand and the supply, which of course, helps decrease prices a little bit, while at the same time, increases volume to offset the impact of lower prices. So overall, we actually viewed the earnings results and the earnings call pretty positive.

- The Lyft team, and you know, this, Ali, just following the company. They've been a hard core cost cutting campaign really from the fourth quarter of 2019. They have now proven that they can be profitable on pressured volumes. Is the company-- have they set the stage to be acquired?

ALI MOGHARABI: That's a good question not sure about that. And the main reason is that, at least, in the US market, which is basically where Lyft is participating the most. In the US market, you have pretty much a lawfully, right.

The Uber Lyft market share is pretty much a 70/30. And because of that since there are only two players, we did see price stabilization before the pandemic hit. And likely we will see price stabilization as the economy continues to return to normalcy and in addition to regular consumer behavior.

So from that standpoint, it doesn't seem like there is a reason for Lyft comparing itself to be acquired. But that's-- that's our initial assumption and review.

- All right. We'll leave it there. Ali Mograhabi, Senior Equity Analyst at Morningstar. Ali, thanks so much for jumping on talk about Lyft this morning.