Lyft has positioned itself to play a bigger role on the ride-sharing market in general, despite analysts being divided over its outlook for near term due to increased competition and macroeconomic uncertainties.
The company is aiming to recover from the turbulent past few years with a new strategic purchase, growing ridership, and improved margins.
Lyft, the ride-hailing company in Europe that is owned by BMW and Mercedes-Benz, announced on Tuesday it will acquire FreeNow for an estimated EUR175,000,000 ($197,000,000) cash.
This deal is expected to be closed in the second quarter of this year and marks San Francisco’s largest international expansion.
FreeNow is available in 150 cities and nine European countries. Lyft says that the purchase will nearly double their market, bringing it to 300 billion personal vehicle trips per year.
After the completion of the integration, the combined platform is expected to cover 11 countries including US, Canada and the key European markets.
Riders can eventually use the app across all regions.
The acquisition of FreeNow does not come without its challenges
FreeNow’s micromobility service, particularly its fleet of electric scooters, is seen as an addition that enhances customer choice and convenience.
The acquisition of Lyft opens up new opportunities for the company, but it brings with it a number of challenges.
Lyft’s efforts to grow in Europe through the targeting of the offline taxi industry will face stiff competition, especially from Uber and Bolt Technology based out of Estonia. Both companies have a strong presence on the continent.
In addition, the European Union is requiring that ride-hailing services improve their driver benefits. This includes a guarantee of minimum wage and holidays paid.
The changes also affect the pricing model to provide drivers with a fair and transparent reward.
Bolt has recently introduced new benefits to its UK drivers in response to regulatory requirements, such as holiday pay and wage guarantee.
Investors should know that Lyft has a current ratio of 0.76. This means the short-term liabilities exceed its available assets.
Oppenheimer begins coverage of Lyft because it has greater ridesharing potential
Analysts are cautiously optimistic about the announcement.
Oppenheimer began covering Lyft on Wednesday with an Outperform rating. The price target was $15.
Ridesharing is becoming more popular as a result of long-term trends, such as the decline in car affordability, and changing demographics. As younger users become adults, ridesharing becomes increasingly appealing.
Oppenheimer wrote that “Ridesharing is becoming a more attractive option with the rising cost of owning a car.”
Lyft has pointed out that its growing supply of drivers is lowering fares, while still maintaining a stable growth in active riders and trip frequencies.
Price Lock, as well as a partnership with DoorDash and other features have helped users spend more.
Oppenheimer stated that Lyft’s cost-cutting initiatives have also given it “significant” earning leverage.
It has also reduced its headcount by 34 percent since 2022. This helps improve the company’s EBITDA, even though it is still priced below competitors like Uber.
Waymo’s competition clouds the future
Not all analysts agree. Bank of America Global Research downgraded Lyft twice in the last month to “underperform” from “buy”, citing increased competition by Alphabet Waymo.
Uber is more susceptible to Waymo’s autonomous fleet due to its greater exposure to West Coast cities, such as San Francisco and Los Angeles.
Michael McGovern, an analyst at BofA, also reduced Lyft’s price to $10.50 compared with $17.50. He expressed concern about the “still-nascent partnerships” for autonomous vehicles.
McGovern added that while Lyft may have the ability to gain ground in the space of audiovisuals, this will likely take place over the longer term. He also pointed out the lack of partnerships for AV that are scalable in the near-term.
He wrote that “we are losing faith in near-term gains” despite acknowledging Lyft’s possible long-term contribution to the AV eco-system.
Wedbush, meanwhile, maintained on Tuesday a neutral ranking on Lyft while lowering its price target to $13 from 16.
FactSet reports that Lyft’s analyst average rating is Hold with an average price target of $15.00.
Analyst optimism supports Lyft’s long-term prospects following the FreeNow acquisition. However, competition risks may change as new updates are made.
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