Ride-share companies Lyft, Inc. (LYFT) and Uber Technologies, Inc. (UBER) have been pummeled in recent weeks, dumping these volatile issues into and through their 2019 lows. Of course, the coronavirus outbreak is to blame, but investors are just now realizing these companies probably won't be profitable by the dates they've told Wall Street, and even worse, there are no guarantees that they'll survive the pandemic.
Customers have received e-mails from both companies in the past 24 hours, outlining steps they're taking to ensure driver and rider safety if either party is diagnosed with COVID-19. However, these procedures will do little to assuage growing fears that taking a trip with either app may be hazardous to your health because you'll be sitting in a back seat shared by hundreds of riders. All in all, it sounds like a perfect breeding ground for the virus.
Both stocks have dropped more than 30% in the past month, hitting extremely oversold technical readings, so it's hard to recommend opening new short sales at this time. However, that's likely to change after the next multi-day short squeeze, setting up a lower-risk opportunity to get on board at a higher price. Unfortunately for those helpful applications, the worst-case scenario could make those sales very profitable in coming months.
Lyft President and co-founder John Zimmer said in early February that he expected profitability by the fourth quarter of 2021. The company came public to great fanfare in March 2019, opening in the upper $80s and dropping like a rock into the May low at $47.17. A steady uptick into the summer months stalled in the upper $60s, carving a lower high ahead of a steep downturn that found support in the mid-$30s in October.
Bulls took control into February 2020, lifting the stock to a six-month high at $54.50, just ahead of an earnings report that generated an aggressive sell-the-news reaction. That downdraft has picked up steam in the past month, slicing through the 2019 low in a series of all-time lows that have now reached round number support near $30. One- and two-day recovery rallies during this period have run into buzzsaws of selling pressure, highlighting a near-violent distribution event.
The best scenario from a short selling viewpoint is to wait for a multi-day bounce that mounts the October low and reaches 50-day exponential moving average (EMA) resistance. However, counter-trend rallies during fear-induced sell-offs often fail to reach this moving average, so more aggressive market players may wish to use the standard 20-day simple moving average (SMA) to enter short positions. In both cases, keep watch of the virus headlines because a little good news is likely to generate a burst of optimism.
Uber reiterated last week that it expects to be profitable by year end. The company has a safer path than its rival because the UberEats division could benefit from millions of Americans forced to stay home in coming months. A May 2019 initial public offering opened at $42, giving way to a rapid ascent that posted an all-time high at $47.08 in June. It carved a sideways pattern near that level into August and broke down, entering a decline that ended in the mid-$20s in November.
The bounce into February stalled at a lower high in the $40s, giving way to a vertical descent that is now trying to stabilize at the .786 Fibonacci retracement of the three-month uptrend. It could break that support level this week, exposing a 100% retracement into the November low. That level marks potential support, but a breakdown would set off all sorts of sell signals that should benefit a momentum entry on the short side.
The Bottom Line
Ride-share companies have been optimistic about their 2020 outlooks, despite the coronavirus outbreak, but their enthusiasm may be misplaced. Common sense tells us that many customers will avoid the services in coming months to avoid exposure to the virus.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.