Buying winning stocks is a path to beating the market, but it’s also important to avoid losing stocks. Buying shares of a company only to see them permanently lose 70%, 80%, or even 90% of their value is tough to bear, and it won’t do your portfolio any favors.
Sometimes good stocks transform into bad stocks, catching investors off guard. But in other cases, it’s clear as day that a stock should be avoided. Here’s why investors should steer clear of ridesharing company Lyft (NASDAQ:LYFT), department store J.C. Penney (NYSE:JCP), and meal-kit provider Blue Apron (NYSE:APRN).
With Lyft’s IPO last month, investing in a U.S. ridesharing company is now an option for investors. Ridesharing is a fast-growing industry for sure — Lyft’s revenue more than doubled last year. That epic growth is the reason Lyft is valued at roughly $20 billion, or nearly 10 times its annual revenue.
But what investors are ultimately buying is empty revenue. Lyft is not even in the ballpark of being profitable, losing close to $1 billion in 2018. It drives growth and battles rival Uber by doling out rider and driver incentives. The company has successfully gained market share over the past few years, but at great cost.
Is there any hope Lyft will eventually produce meaningful profits? I doubt it. The company provides a commodity service with minimal switching costs for riders and drivers, has little pricing power, doesn’t benefit from a broad network effect, competes with a deep-pocketed rival, and is banking on autonomous cars to somehow provide it a with competitive advantage in the future. Good luck with all that.
And don’t forget about the regulatory risk associated with Lyft’s dependence on contract workers. The company’s entire business model could be derailed if it has to start classifying drivers as employees.
Lyft is the most exciting IPO so far this year, and some investors will be drawn to its growth prospects. But it’s just not a good business.
It can be tempting to bet on the underdog. Sometimes, companies in dire straits can turn themselves around and make miraculous comebacks that are highly lucrative for investors.
But comebacks are…
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