Lyft, Inc. (LYFT) stock has dropped nearly 5% in Wednesday's pre-market session even though the ride-sharing company beat fourth quarter 2019 profit and revenue estimates. Upside first quarter 2020 and EBITDA guidance failed to slow the sell-the-news reaction, with short-term traders taking profits following a 15% three-day rally to a six-month high. Continued anxiety about mounting losses drove selling pressure as well, even though the company still expects to become profitable by the fourth quarter of 2021.

Rival Uber Technologies, Inc (UBER) moved its profitability target from fiscal year 2021 to the fourth quarter of 2020 when it reported fourth quarter 2019 earnings last week, setting off a flurry of upgrades that underpinned a rally to the highest high since August 2019. That set a high bar for Lyft, which it failed to mount in the otherwise upbeat earnings release. Analysts raised the issue repeatedly in the post-news conference call, forcing executives to insist that Lyft was making the right moves.

Lyft operates in the United States and select Canadian cities, with 22.9 million customers accessing the service in the fourth quarter. However, the company's growth rate slowed to a 2.6% pace in the second half of 2019 compared to 6% in the first half. That's worrisome because the company has never reported a profitable quarter and continues to burn start-up capital at a rapid pace. Meanwhile, Uber's reach is worldwide, with 111 million customers in the fourth quarter. 

California's Gig Economy Law, which went into effect on Jan. 1, poses a major threat to the bottom lines of both companies. The statute redefines independent contractors in an attempt to get ride-share and food-delivery services to hire workers and pay benefits. On Monday, a U.S. District Judge rejected a request from Uber and privately held Postmates Inc. to overturn the law but allowed the lawsuit to proceed, so it may be several years before a final decision is reached.

Lyft Daily Chart (2019 – 2020)

Daily chart showing the share price performance of Lyft, Inc. (LYFT)
TradingView.com

The company came public in a highly anticipated March 2018 offering, opening in the upper $80s and dropping like a rock in the first two sessions. Selling pressure eased in the upper $40s in May, giving way to a recovery wave that stalled in the mid-$60s in July. Bears took control once again in August, dumping the stock through the May low, ahead of continued downside into October's all-time low at $37.07.

The stock bounced into the broken May low in November and reversed, carving an inverse head and shoulders pattern that yielded a high-volume breakout on Monday. The uptick stalled near $54 on Tuesday, while the post-news reaction has settled just above $51. So, despite the downturn, Lyft stock is still trading above the breakout level, raising the odds that a pullback below $50 would offer a low-risk buying opportunity.

The on-balance volume (OBV) accumulation-distribution indicator tracked price to lower ground in 2019, also hitting an all-time low in October. Buying power through January 2020 showed little enthusiasm, but the most recent surge has lifted OBV to a six-month high. Just a single resistance level now stands in the way of a volume burst that reaches the level posted during the public offering.

Relative strength cycles are also working in the bulls' favor, with the weekly stochastic oscillator now crossing into the overbought zone. This thrust sets off a "stochastic pop" buying signal, popularized by Jake Bernstein in his 1995 book "The Compleat Day Trader." The signal addresses a tendency for the final stage of a rally to book the strongest upside. Taken together with the recent breakout, Wednesday's sell-the-news reaction could easily attract a fresh supply of committed buyers.   

The Bottom Line

Lyft stock could bottom out quickly after Wednesday's sell-the-news reaction and post new 2020 highs.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.