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Lyft Inc (LYFT) generated $766 million in free cash flow (FCF) last year, or over 13% of its revenue. However, LYFT stock has a 15% FCF yield now - too high - i.e., its valuation is simply too low. Based on a conservative 10% FCF yield, LYFT could be worth at least 31.5% more at $17.74 per share.
LYFT is at $12.21 in midday trading on Monday, March 17. That is up slightly from a recent low of $11.43 last week on March 11, and even below where it closed last year at $12.90. However, it's about flat from six months ago when LYFT closed at $12.25 on Sept. 17.
Even more amazing is its free cash flow (FCF) yield valuation. For example, last year's $766.3 million in FCF represents over 15% of its market cap today of $5.085 billion. That is simply too high an FCF yield.
Free Cash Flow and Margins
Free cash flow yield is an important valuation metric since it shows what the market thinks about the quality of the company's earnings. In this case, the inverse of the 15% FCF yield implies that the market is only willing to value Lyft's FCF at a multiple of 6.6x.
That is simply too cheap. The market might be expecting Lyft can't sustain this level of FCF. There may be some element of truth in that estimate. But, not really. Let's look at that.
Last year Lyft's $766.3 million in FCF represented 13.2% of the company's $7.786 billion in annual revenue. However, the Q4 margin was lower at just 9.0%, and this was also lower than the Q3 FCF margin of 16% (i.e., $243m / $1.522b sales).
However, the company likes to look at its trailing 12-month (TTM) FCF performance, since this irons out seasonal effects in its business. The Lyft supplementary data table below shows that in the most recent TTM period, Lyft generated 19.5% higher FCF.
Moreover, the TTM margins were higher as well. For example, in Q3 the company's TTM revenue was 5,460.3 million, based on data from Seeking Alpha. So, its TTM FCF margin was:
$641m TTM FCF / $5,460.3m TTM Revenue = 0.11365 = 11.4% TTM FCF margin
But that is well below the 13.2% 2024 FCF margin (see the first table above). In fact, the FCF margin rose over 15.7% on a Y/Y basis in the past quarter.
So, that implies that the company's FCF margins over the next year should be sustainable - not lower as implied by the lower Q4 FCF margin.
Therefore, we can use at least a 12% FCF margin estimate to project the company's FCF.
Target Valuation Based on FCF Yield
For example, analysts now forecast $6.54 billion in revenue this year, up 13% over 2024. And for 2026 they project $7.35 billion, up another 12.3%. Therefore, it seems reasonable to forecast the next 12-month (NTM) revenue of at least $7.0 billion.
So, if we apply a 12% FCF margin against this revenue forecast, FCF could rise by 9.7% to $840 million:
$7,000m NTM revenue x 0.12 = $840m NTM FCF = $840m/766.3m = 1.0966 = +9.7%
As a result, the market might be willing to raise the FCF yield valuation metric. For example, here is what happens when the FCF yield is lowered to 10% (from its present 15% FCF yield):
$840m FCF / 0.10 = $8.4 billion market cap
This is 65% higher than its $5.085 billion market cap today. That implies that LYFT stock has a target price of $20.15 per share.
Just to be conservative, let's assume the FCF stays flat but the market values the stock with a 12% FCF yield (i.e., 8.33x FCF):
$766m FCF x 8.33 = $6,381 million market cap
This is still +25.5% higher than today's $5.085 billion market cap. In other words, even with a conservative assumption, LYFT is worth $15.32 per share. So, on average we can set a price target of at least $17.74 per share, +31.5% higher.
Analysts tend to agree. For example, 46 analysts surveyed by Yahoo! Finance have an average price target of $17.22 per share. Similarly, Barchart shows a mean price target of $17.24. Both of these are close to my estimate of $17.74.
AnaChart.com, which tracks analysts' performance, shows that 36 analysts have an average price target of $17.06 per share. The point is that LYFT stock looks deeply undervalued here, both from an FCF margin/FCF yield standpoint, and also from analysts' price targets.
One way to play this is to sell short out-of-the-money (OTM) put options in nearby expiry periods. That way an investor can set a lower buy-in target price and get paid while waiting.
Shorting OTM Puts
For example, the April 17, 2025, expiration period, one month away, has attractive yields. It shows that the $11.00 strike price puts, over 9% out-of-the-money (OTM), have a bid side premium of 30 cents per put contract.
That means a short seller of these puts, giving them an obligation to buy shares at $11.00 if LYFT stock falls to that price in the next month, can make an immediate yield of 2.73% (i.e., $0.30/$11.00 = 0.02727).
This occurs if the investor secures $1,100 in cash per put contract shorted - the account will then receive $30 per shorted put contract. This allows the investor to set a lower buy-in and get paid.
In fact, if the investor is hoping to have the put contract assigned in order to assure that they buy LYFT shares, they could “Sell to Open” the $12.00 put strike price. That is very close to the $12.17 stock price and the probability of this occurring is 42% (i.e., the delta ratio). But the investor stands to do quite well here.
First, the premium received of 65 cents represents 5.42% of the $12.00 strike price. And even if the stock falls to $12.00 and the account is assigned to buy 100 shares at $12.00 per contract shorted, the breakeven price is lower at $12.00 - $0.65, or $11.35. That presents a good potential upside for the investor, given the target prices we discussed above.
However, there is a significant risk that the investor could end up with at least a temporary unrealized loss. That might happen if LYFT falls below the breakeven price. Investors should study the Barchart Options Learning Center to review the risks associated with shorting cash-secured puts.
The bottom line is that LYFT stock looks deeply undervalued here. One way to play this is the short OTM puts in nearby expiry periods.
