Lyft Gets Hit With First "Sell" Rating

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Ridesharing platform Lyft (NASDAQ: LYFT) has only been trading on the public market for a couple of days, and it's been a bumpy ride. Shares fell below the IPO offering price of $72 yesterday, with many other Silicon Valley tech unicorns that are preparing to go public keeping a close eye on the action. Lyft shares were just hit with their very first sell rating by Seaport Global Securities, which assigned a $42 price target after initiating coverage.

Here's what investors need to know.

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Lofty valuation requires a "leap of faith"

The biggest concern that Seaport analyst Michael Ward has is valuation. Ridesharing is still a relatively nascent market, with Lyft estimating that just 1% of miles traveled in the U.S. come from rideshare networks. While adoption continues to march higher, particularly in urban cities, it's less clear where the upper limit will be, as many consumers will still ultimately prefer to own private vehicles, particularly in suburban and rural areas.

"Investors need to take a big leap of faith that the millennials and later generations will forgo ownership of a car and opt instead for reliance on a ridesharing service," the analyst wrote. "Despite the optics of vehicles being an underutilized asset, we believe people will continue to own their own vehicles as primary transportation and instead rely on the ridesharing services as a convenient supplement."

It's true that the average driver's car is underutilized -- most people's vehicles sit idle 95% of the time -- and that we collectively allocate far too much real estate to parking. It's also true that people put a premium on the independence, convenience, and freedom of mobility that owning a car provides. Even as Lyft is expected to grow active riders, which now total over 18.6 million and will help grow revenue, profitability will remain elusive for the foreseeable future.

Ward is modeling for Lyft to generate $3.4 billion in revenue in 2019, up from $2.2 billion in 2018. Sales should then climb to $5.5 billion in 2021, according to Ward's estimates. Lyft is targeting a 20% EBITDA margin, but doesn't really have any good ideas how to get there. For reference, here are Lyft's adjusted EBITDA margins from the past three years.

While valuation is often a comparative exercise of measuring a company against a peer, Lyft has no pure-play rivals that are publicly traded (yet). Still, no one would argue that Lyft shares are cheap, as they currently trade for over 10 times sales while the company's costs are already too high to turn out a profit. Intensifying competition will only make positive margins even harder to achieve, and Uber is notorious for its willingness to burn through investor capital in order to expand market share at the expense of rivals.

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Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.