Incredible growth prospects, enough cash to survive the coronavirus pandemic, and getting closer to profitability make these stocks a buy.
The novel coronavirus is causing cities, states, and countries to halt non-essential economic activity around the world. Ridesharing has been hit particularly hard as people are encouraged to stay home, colleges and universities are shifting to online learning, and so many other frequently made trips are no longer happening.
Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) have seen shares fall 45% and 30%, respectively, from their recent highs, while Tesla (NASDAQ:TSLA) has seen its shares fall over 40% from its recent peak. Let’s look at why this could be an opportune time to pick up shares of these incredible growth stocks that are facing headwinds caused by the coronavirus outbreak.
Uber is delivering growth
Uber is an incredible growth story. In the previous three years, it has grown gross bookings at a 50% compounded annual rate (CAGR). Admittedly, much of this growth was achieved unprofitably. However, the competitive landscape was looking much brighter before the coronavirus outbreak.
The ratcheting down of the growth-at-all-costs philosophy is encouraging to investors who want to see more responsible management of the business. Now, with 111 million active riders worldwide and a reduction of incentives to customers, profitability appears to be within reach — that is, when economic activity resumes to normalcy.
What’s more, the Uber Eats segment is experiencing gross bookings growth at 73% year over year. That’s a good deal ahead of the overall numbers. Additionally, while Rides is seeing significant decreases in revenue during the pandemic, the Eats segment is proving to be more resilient. According to information released by the company on March 24, Eats sales increased by 10% the week prior and saw a 30% increase in people signing up to deliver food in the U.S.
Admittedly, the Eats business is still a loss generating one for Uber. However, there will be cost efficiencies with scale. Moreover, the company is increasing the take rate in the segment. In its most recent quarter, it went from 6.4% to 9.5% year over year and the company believes it can achieve a long-term target of 15%.
A more focused strategy
In contrast to Uber, Lyft has a more focused strategy. It’s choosing to take part in only the Rides business. Nonetheless, that hasn’t stopped the company from achieving strong growth. It hurdled a significant milestone in its most recent quarter, eclipsing $1 billion in quarterly revenue, which was up 53% year over year. The growth is fueled by increases in revenue per rider, and more riders overall, that is each coincidentally up 23%.
Whether the focused strategy employed by Lyft or the broader approach taken by Uber will win out is uncertain at this point. However, investors can reduce company-specific risk and be exposed to both strategies by owning both companies.
Finally, Lyft has a $2.8 billion cash and short-term investment reserve in its balance sheet. That stockpile, combined with the fact that a large portion of its expenses is variable (drivers), means the chances of the company facing a liquidity crunch are slim. Still, the pandemic is likely causing revenue to decrease substantially, and so the next few weeks to months will be challenging.
That’s what makes buying the stock now a higher risk than usual. At the same time, that’s what’s providing the opportunity to buy the stock at close to half of the 2020 peak price of $54 reached on Feb. 11.
Tesla is investing in growth
The Elon Musk-led company often boasts about being able to grow revenue incredibly fast with limited to no marketing spend. Over the last four years, revenue has grown at a CAGR of 57%.
The increases are because of rising capacity and production, mainly by ramping up its Model 3, a fully electric four-door sedan, which is generating strong organic demand.
Tesla delivered more than 287,000 Model 3s in fiscal 2019. Moreover, the company added capacity to build an additional 150,000 Model 3 cars per year at its Shanghai facility, which will help further sustain the incredible growth, reduce transportation expenses, and provide some diversification in production. The final point is especially vital during current circumstances.
Additionally, Tesla started production of a new Model Y, a fully electric SUV, which it will start delivering by the end of its first quarter of the fiscal year 2020. Admittedly, this goal may need to be pushed back a quarter or more because of the closure of the Freemont facility. However, given the popularity of SUVs, the company is expecting the Model Y to do just as well as the Model 3 when it ramps deliveries.
Amid the coronavirus induced shutdown of all non-essential business in California, Tesla reluctantly stopped its operations in the Freemont facility. The location was ramping up to be capable of producing over 500,000 cars by mid 2020. Now, the timeline for the increase is uncertain.
The question marks surrounding Tesla are greater now amid the coronavirus pandemic. Importantly, investing in the stock market is a balancing act between risk and return. Where risks are higher, there may be an opportunity for increased return. You could wait for more clarity into the aftermath of the outbreak, but then you may have to pay higher prices.
What this means for investors
The coronavirus outbreak is disrupting operations for all three of the businesses mentioned above. However, when the pandemic has run its course, economic activity should start to normalize.
If you wait until then to start accumulating shares, prices might be much higher than current levels. Uber, Lyft, and Tesla are great growth stocks that also come with a high degree of risk. Investors looking to accumulate shares should do so with money they don’t expect to need for at least the next few years.
Author: Parkev Tatevosian