The Update Issue: Lyft Drops a Bomb, Amazon Wins a Vote, and a Retailer Finds a New Way Into the Spotlight

Shares of ride-hailing app Lyft (LYFT) plunged 30% yesterday on a disappointing earnings report... LYFT shares are now trading at a level only before seen during the COVID-19-induced crash of March 2020 and are trading at a fraction of the 2019 initial public offering ("IPO") price of $72... This was the worst one-day drop ever […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Lyft Drops a Bomb, Amazon Wins a Vote, and a Retailer Finds a New Way Into the Spotlight By Berna Barshay --------------------------------------------------------------- [Bombshell opportunity: 'America's Next Big Monopoly']( A little-known company is making all the right moves to destroy the competition in today's hottest industry. The media is already comparing it to the biggest success stories of our times. While Forbes says this company could be the next Apple or Microsoft, Barron's says this could be the "next big thing." Bill Gates has already invested millions into this company. So has tech investor Cathie Wood. If you're looking for massive gains... [this could well be the biggest opportunity of your lifetime](. --------------------------------------------------------------- Shares of ride-hailing app []Lyft (LYFT) plunged 30% yesterday on a disappointing earnings report... LYFT shares are now trading at a level only before seen during the COVID-19-induced crash of March 2020 and are trading at a fraction of the 2019 initial public offering ("IPO") price of $72... This was the worst one-day drop ever for LYFT shares and the catalyst was soaring labor costs, which are dampening the outlook for the ride-hailing app sector. Lyft reported $876 million in revenue for the first quarter, which was actually 4% above Wall Street expectations. Adjusted earnings before interest, taxes, depreciation, and amortization ("EBITDA") also beat expectations, although the adjustments here are intense – including backing out of items like stock-based compensation expense, payroll taxes on stock comp, and some insurance expenses. With these kinds of big adjustments of what are really operating costs, it's important to keep an eye on the unadjusted bottom line... which is still decidedly full of red ink. But the real story here is labor cost and availability. With demand for rides bouncing back from the pandemic, both Lyft and its rival Uber (UBER) are scrambling to recruit drivers and are faced with paying big incentives and bonuses to ensure that drivers will be available to fulfill requested rides. As this chart from Bloomberg shows, prices for rides from both Lyft and Uber have soared versus pre-pandemic levels... Source: Bloomberg But even skyrocketing prices haven't been enough to offset the pressure of having to compensate freelancers more to show up for work and accept rides. Lots of former drivers found other things to do during the pandemic when the demand for rides plunged. Now Lyft is trying to lure them back, but it's not easy if these people have found other ways to make money. The soaring price of gas is another thing making driving for Lyft less appealing than it was back in 2019. Shares of rival Uber fell as much as 12% intraday in sympathy, despite reporting a much better first quarter. Uber beat revenue estimates and offered a fairly upbeat forecast – but couldn't shake off the doom and gloom that the Lyft earnings release brought to its corner of the market. After all, Uber is subject to the exact same inflationary labor forces as Lyft is. --------------------------------------------------------------- Recommended Link: [Empire Financial Research is changing forever]( For our serious readers, we've created a new, standard experience. It might just be the best deal in the entire newsletter industry. But hurry, there are limited spots, and they're going fast. [Click here for the full details](. --------------------------------------------------------------- I've been an Uber and Lyft bear since I started writing Empire Financial Daily essays... At times, I felt like a broken record... but these companies are the poster children for profitless prosperity. Here's a passage from the [December 15, 2020 Empire Financial Daily]( that sums up my feelings about the ride-hailing space well... From 2016 through the time of its IPO last year, Uber operations lost a cumulative $10 billion. It's the poster child for what I like to call "profitless prosperity": racking up big revenues yet failing to earn a dime. Investors tolerate – in fact, they even embrace (especially lately!) – profitless prosperity when they see a credible story that with just a little more size and scale, profits will follow revenues. The problem with Uber is that in the time period that it lost the $10 billion, it took in more than $79 billion for rides. How much bigger does it have to get to pay for its technology and overhead? How much scale does it need? And where will cost cuts come from when the Internet is full of stories that many gig workers can barely make a living driving for the company? Since going public in May 2019, Uber has racked up nearly $4 billion in additional operating losses. While the pandemic has certainly thrown the company a major curve ball, in its best quarter in 2019 – well before the pandemic – Uber still lost nearly $600 million in EBITDA. Demand was never the issue here. Except for at the height of the pandemic, there has always been plenty of demand for app rides... Who wouldn't prefer being picked up where you are versus roaming around trying to hail a taxi? Plus the cars from the ride-hailing apps tend to be nicer, cleaner, and newer... There's a reason that really rich people in cities have always employed personal drivers! The issue has always been about whether these companies can make money! And Lyft's report this week is yet another piece of evidence in the column of "no, they can't." First, the bulls asked for patience – these companies just need a little more scale. Then, we just needed to get through the pandemic. Now, they still can't make money even with massive price increases versus the same time three years ago, pre-pandemic? YipitData shows the average ride share trip up 45% from first-quarter 2019 pre-pandemic levels... This is enviable pricing power, yet it still isn't enough? Something continues to feel broken about this business model to me. Not only is the financial model breaking, but so is the customer experience. According to an analysis of 30 cities conducted by brokerage firm Gordon Haskett, average wait times have been climbing for rides in late April – indicating that all this money to recruit drivers still hasn't solved the supply problems. Lyft indicated it would turn up the incentive spending to recruit more drivers in the second quarter. This is one reason the stock fell so much – this is not a single-quarter problem. Over at Uber, management tried to deflect worries about driver shortages by touting its diversification into other areas, like its Uber Eats food delivery service. Uber explained that ride hailing and food delivery demand can be inversely correlated, as they were in the pandemic, when demand soared for Uber Eats while demand for rides tanked. This theoretically makes Uber a more attractive company to drive for. While this is compelling logic, I would counter that the food delivery business is totally unprofitable. This tweet about the situation at Uber made me chuckle and sums up my feelings pretty well... Source: []Twitter/@veryfinanceguy I would also argue that if Lyft is going to be handing out driver incentives like candy on Halloween, Uber is going to have to follow suit. The hedged portfolio of consumer demand is a nice theoretical, but these drivers aren't employees. They are freelance mercenaries, and they can and will follow the highest bid. Why would they care about the theoretical long-term strategic superiority of Uber's business model relative to Lyft's? They don't even get health insurance. Unsurprisingly, I still recommend that you avoid LYFT and UBER shares. These stocks have been losers during my entire tenure at Empire Financial Research, and I don't expect that to change anytime soon... Just weeks after workers at its large Staten Island warehouse voted to unionize, tech giant Amazon (AMZN) got a reprieve from organized labor efforts at a smaller facility nearby... The proposal to unionize at the warehouse won just 380 votes... while 618 workers voted against unionizing. About 600 eligible workers didn't vote at all. This is probably a great relief to Amazon. The company is seeing a surge in efforts to unionize at its warehouses, which feature notoriously high-pressure work conditions – but do pay well above minimum wage. As the New York Times explains... For Amazon, the overwhelming win may temper fears among executives that unionization could take off across its work force. The company, which has raised wages and spent millions of dollars on anti-union campaigns, depends on a steady stream of hourly workers. The result was a setback for the upstart Amazon Labor Union, which scored an against-all-odds win last month at the larger, nearby Amazon warehouse. The loss also points to the possible limits of an uptick in worker interest in unionizing at Amazon and beyond. One difference between the larger facility that voted to unionize and the smaller one that just rejected it: the one that voted to unionize had way more full-time workers. Part-time workers are generally less financially stable and less likely to rock the boat because of their relative financial insecurity. This vote was clearly a win for Amazon, but it's far from the end of its battle with organized labor. You loved the memes, now come to the movie... There's an entire section of the Internet devoted to Spirit Halloween memes. The retailer provides great meme fodder for lamenting failed startups, bankrupt retailers, and shuttered corporate initiatives. Regular Empire Financial Daily readers will likely remember this one I shared [last week]( about the shuttering of streaming service CNN+... The meme even works for politics... Source: Twitter/@SpiritHalloween Well, now we're getting a movie about the store. It features actors Christopher Lloyd and Rachel Leigh Cook. Variety obtained the following blurb about the film's plot... When a new Spirit Halloween store appears in a deserted strip mall, three middle-school friends who think they've outgrown trick-or-treating make a dare to spend the night locked inside the store Halloween night. But they soon find out that the store is haunted by an angry evil spirit who has possessed the creepy animatronic characters. The kids embark on a thrilling and spooky adventure in order to survive the night and avoid becoming possessed themselves. The retailer teamed up with three Hollywood production companies to produce the movie, which is a fairly novel way to keep itself in the news. Given the company's involvement, it's no surprise this Halloween-themed flick won't be a slasher pic... If you are trying to drum up interest in visiting your store, filling it with gore probably isn't the answer! This feels like some next-level product placement, but with a movie based on Play-Doh already in the works, on a relative basis, it doesn't seem like too big of a narrative stretch. In the mailbag, some responses to my question about why landlords leave retail space sitting empty for years instead of lowering the rent... If you're still bullish on Uber and/or Lyft, can you offer me a bull case and tell me what I am missing? Do you think this Spirit Halloween movie sounds like one long commercial... or is it instead inspired product placement to keep the retailer top of mind when we head into Halloween shopping season? Share your thoughts in an e-mail by [clicking here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). "'This makes me wonder if there is something very wrong in the tax code or commercial real estate regulations... Landlords should want to lease this empty space – and lower the rent so it fills.' "It's not the tax code. Most major chains that run retail stores run them under triple-net-leases. Walmart (WMT), for example, does not own any of its locations. It will scout and build a location according to its needs, and then it will sell that location to a 'net-lease' investor that gets paid a 'cap-rate' based on the value of the property. A $10 million Walmart, for example, may have a cap-rate of 7%, meaning an investor will earn $700,000 a year in income from Walmart for the life of the lease, which can be 30 years. "The value of a triple-net lease is that a real estate investor has to do none of the work of a landlord. All the maintenance, property taxes, and other elements are done by Walmart itself. The investor basically does nothing but collect a coupon as if he bought a bond. The value to Walmart is that it takes real estate off its books, since property values can run counter to the value of the retail operation, and it also removes mortgage debt and other real estate associations from Walmart's core business. For example, the $10 million that Walmart spent to build their store comes through mezzanine finance. They don't want to float that debt, so they offer a net-lease agreement to retire that financing and then simply pay the cap rates from operating cash flow. It becomes built into the cost per square foot. "There is another feature of the triple-net-lease that is relevant to your question. Part of the provision of a good net-lease agreement is that the chain promises to maintain the cap rates even if the location 'goes dark.' A Walmart location that gets shut down and does no business will not affect the payment going to the landlord. The landlord still gets his $700,000 for the life of the lease. "What you are seeing in New York, among the big retail chains, is not empty storefronts. All of those landlords are being paid their leases without fail. That is why lease prices keep going up even though it 'looks' like so many storefronts are empty. "Steve Sjuggerud is into real estate and I am somewhat surprised he's never explored this option. Roger Staubach built his fortune on this after his football career. I don't know, maybe the returns are too low for Steve." – OP "One is reluctant to lower the cost of leasing their commercial property because doing so will destroy value, usually exponentially. (A 10% drop in rent may equate to a 20-40% drop in value.) Since the demand for commercial property is very dependent on the business cycle, some owners choose to wait for what they hope will be a turnaround. "The only time I'm aware that a landlord is better off having an empty store than leasing it (other than the reason cited above) is the very rare case where the operating costs of staying open exceed the rent. That happened with office buildings on Century Blvd in Los Angeles 15 or 20 years ago; the costs of keeping some open exceeded the potential rent, so many were shuttered for years." – Bill B. Berna comment: Thanks for sending in these responses – they are very helpful! Regards, Berna Barshay May 5, 2022 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. 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