Trade Ideas November 10, 2020

LYFT Q3 Earnings Preview & Trade Update

by Dan

Today after the close LYFT will report its Q3 earnings. The options market is implying about a $3.50 move in either direction or about 10%, which is basically inline with the stock’s average one-day post-earnings move over the last six quarters since its 2019 IPO.

The stock has had a massive rally over the last two weeks, since making new six month lows on Oct 28th, to yesterday’s highs, the stock gained nearly 80%, which still places the stock down 15% on the year as I write, and down 33% from its 52-week highs made in February.

Last week on my In the Money show with Fidelity Investments (watch here) and on Risk Reversal (here) when the stock was trading just above $29 I highlighted what I thought was a unique bullish trade setup in LYFT to ride the wave of a favorable vote in California for how they define their workers and as a post-pandemic winner:

Here’s what the LYFT chart looks like four trading days later after yesterday’s explosion from the news out of Pfizer regarding the efficacy and timing of their coronavirus vaccine:

Heading into the print, expectations are clearly high. Here is RBC Capital’s star internet analyst Mark Mahaney’s earnings preview to clients on Nov 8th, he rates the stock a buy with a $48 twelve-month price target:

Our view: Based on intra-quarter data points and our model sensitivity work, we think Street estimates for Q3 are ballpark reasonable, with a slightly greater chance of upside vs. downside variance. We think Sept Rides were down similar to Aug (-53% Y/Y), but Rev growth should outpace Rides due to the lower incentive environment, which was supported by Uber’s Q3 U.S. and Canada Mobility commentary. In terms of Street Q4:20 Revenue estimates (-34% Y/Y), we believe these are aggressive, as Uber’s U.S. Bookings were down 55% Y/Y in Oct

…Key points: Lyft Will Report Q3 Results on November 10 th After the Close: We are forecasting Rev of $526MM (-45% Y/Y growth), above the Street at $488MM, and EBITDA loss of -$253MM, in-line with the Street at -$255MM. Our above Consensus Rev estimates reflect our view that incentives will be materially lower in the current environment, and given the divergence in Rides vs. Rev growth in Q2 (Rides were down 69% Y/Y on average, yet Rev only declined 61% Y/Y), and our view that Sept Rides were largely in-line with Aug, we think the company will continue to benefit from lower incentives and the resulting higher Rev per Ride.

Key Items: 1) Active Riders: We are forecasting 12.8MM Active Riders (Street @ 12.0MM), implying 4MM Q/Q Net Adds. 2) Rev Per Active Rider: We are forecasting $41.01 in Rev Per Active Rider in Q3, implying -4% Y/ Y growth (vs. -2% Y/Y in Q2:20, on a 5-pt tougher comp). 3) Contribution Profit: We are forecasting a $238MM CP for Q3, implying a 45% CM (vs. 35% in Q2)—mgmt noted CM would increase 10pts if Aug/Sept Rides levels remained at July levels.

With the stock up 27% since the time of the trade idea last week, it makes sense to adjust this bullish view, here it is again from Nov 5th:

Bullish Trade Idea: LYFT ($29.19) Buy Jan 30 – 42.50 call spread for $2.50

-Buy to open 1 Jan 30 call for $2.80

-Sell to open 1 Jan 42.50 call at 30 cents

Now with the stock at $37.20 the $12.50 wide call spread that cost $2.50, which could only have yielded a profit of $10 is worth about $6.50 with more than two months to expiration, very near the mid-point of the spread. The risk-reward is no longer that favorable, risking $6.50 to make possibly another $6 in two and a half months.

I might consider rolling the spread up a bit, for instance, selling to close the original spread, booking a $4 profit, and rolling into possibly the Jan 37.50 – 50 call spread for about $3 (buying 1 Jan 37.50 call for $3.55 and selling 1 Jan 50 call at 50 cents). This call spread roll would result in a $1 profit and offer a profit potential of up to $9.50 between 40.50 and 50 on Jan expiration. Or one could merely buy the near the money call in Jan and look to spread by selling a higher strike call if the stock were to move higher post results.