Lyft is Gushing Huge Amounts of Free Cash Flow -- Someone Tell Wall Street

Lyft (NASDAQ:LYFT), Inc. (LYFT) generates large amounts of free cash flow (FCF) and seems to be under the radar on Wall Street. Based on conservative projections and the company's guidance, LYFT stock could be worth over $31 per share, or +70%.

As of Nov. 12, LYFT was at $18.34, with a market cap of $7.61 billion. This article will show why it could be worth over 70% more, or $31 per share with a $13+ billion market valuation.

This is based on a 16% FCF margin estimate and analysts' revenue forecasts for 2025.

Moreover, out-of-the-money (OTM) put options with nearby expiry periods could be a potential short-play opportunity here. That way an investor can potentially lower their buy-in target price and get paid to wait for LYFT to hit this price.

Lyft's Strong Results

Its gross bookings and rides rose 16% YoY and active riders were up 9% YoY.

Revenue was up +32% YoY.

Q3 FCF was strong at $242.8 million, although slightly lower than Q2's $256.4 million.

Nevertheless, over the last 12 months FCF hit $641.2 million.

Management projected that its total 2024 FCF is forecast to exceed $650 million. (Note: free cash flow equals operating cash flow, less capital expenditures, and net equipment sales. FCF shows how much excess cash a company generates, and is thus free to be spent on buybacks, dividends, acquisitions, etc.)

Q3 Adj. FCF and Margins

This was significantly higher than the $641 million in the last 12 months (LTM) FCF. Its LTM FCF margin was 11.7% of $5.46 billion in LTM revenue (i.e., 17.3% Q3 FCF margin vs. 11.3% LTM FCF margin).

This was because Lyft has been increasing its cash flow generation, as seen in the chart above. So, going forward, its free cash flow margins will likely stay high.

Projecting FCF for 2025

Based on analysts' estimates of $5.79 billion in revenue for 2024, FCF could be as much as $880 million.

Here's why. If analysts' estimates of $1.56 billion for Q4 revenue occurs, and even with a much lower 12% operating cash flow margin, free cash flow for the year would still be $880 million. That would represent a 15.2% FCF margin for 2024.

Moreover, as the table above shows, with a 16% FCF margin applied against analysts' 2025 revenue forecasts of $6.6 billion, FCF would rise over $1 billion:

0.158 x $6.6 billion 2025 est. sales = $1.044 billion in 2025

$1.044b / $641.2 TTM FCF in Q3 = +63%

That would be 62.8% higher than the trailing 12 months (TTM) FCF of $641.2 million at the end of Q3.

That is why LYFT stock may be worth up to 70% more.

Price Targets for LYFT Stock

For example, using a 6.5% FCF yield for LYFT stock is the same as multiplying FCF by 15x:

= 1/6.5% = 1/0.065 = 15.4x

So, multiplying the $650 billion in FCF for 2025 by 15.4x equals a market cap of $10 billion, or 31.5% higher than today's $7.6 billion.

Moreover, as the table above shows, the estimate for 2025 is for a $16 billion target market value, or +111%.

So, on average LYFT stock could be worth 71% more at $31.42 per share.

Wall Street Got It Wrong

However, some analysts agree that LYFT stock is undervalued. For example, AnaChart's survey of analysts shows a mean price of $22.32.

AnaChart.com is a new site that tracks analysts' price targets (as if they were stocks). Its target is 21% higher than today. However, this is still not close to our 71% higher price target of $31.42.

The bottom line is that LYFT looks undervalued here based on its strong FCF and FCF margins.

Shorting out-of-the-money (OTM) put options (in nearby expiry periods), along with holding LYFT long, is a potential opportunity here.

Shorting Out-the-Money Puts

That means selling short puts at strike prices well below today's trading price. That means making immediate income and giving investors a defensive range against deterioration in LYFT stock before the investor has to buy shares at the strike price.

For example, note that the $16 put option strike price has a large number of oustanding contracts, providing good liquidity.

Its bid side premium is 25 cents. That gives the short seller an immediate short-put yield of 1.56% (i.e., $0.25/$16.00 = 0.0156).

Here is how that works. The investor secures $1,600 for every put option shorted. Then, after entering an order to Sell to Open the account will receive $25.00 (hence the 1.56% yield).

For example, to short 10 puts the investor would secure $16,000 in cash or buying power with their brokerage firm. Then, after selling short 10 puts at this strike price, the account will receive $250.

Leverage and Downside Risks

That implies a low chance that LYFT falls to $16.00 or over 12% over the next month.

Moreover, the investor would have a breakeven price of $16.00-$0.25 ($15.75), over 14% below the trading price of $18.34.

So, some less risk-averse investors might be willing to short the $17.00 strike price put. That implies a short put yield of 2.94% (i.e., $0.50/$17.00). This play has just a 27% implied probability of occurring as seen with the delta ratio.

As a result, if LYFT stock stays flat for the next 3 months, the implied expected return (ER) is close to 9% (i.e., 2.94% x 3 = 8.82%).

The bottom line is that LYFT stock looks very cheap here. One way long-term investors in LYFT stock can play this is to sell short deep out-of-the-money puts. That way they can get paid while waiting for the stock to fall.

This content was originally published on Gurufocus.com