Lyft Inc. (LYFT) stock had large, unusual call options activity yesterday. This highlights how LYFT stock looks cheap to call option buyers. That could be because LYFT expects large free cash flow and FCF margins this year.
LYFT ended 2024 at a recent trough of $12.90 per share, well off its recent high of $18.59 on Nov. 11. That was after the company’s strong Q3 results released on Nov. 6.
My Nov. 22 GuruFocus online magazine showed that LYFT stock could be worth between $24.11 and $38.78 per share: “LYFT is Gushing Huge Amounts of Free Cash Flow – Someone Tell Wall Street.” More on this below.
This has presented a huge buying opportunity for bullish call option buyers on the stock.
Unusual Call Options Activity
Barchart’s Unusual Stock Options Activity Report on Wednesday, Jan. 1, 2025, shows that over 12,700 call option contracts at the $15.00 strike price have traded in LYFT for the Jan. 24, 2025, expiration period.
This is over 125 times the prior number of call option contracts outstanding. In other words, some institutional buyer(s) are now extremely bullish on the stock.
This is a bullish position given that the strike price is well over the $12.90 trading price, so it is out-of-the-money (OTM).
In other words, LYFT stock will have to rise by $2.10 per share, or over +16.2% before there will be any intrinsic value in the call options (i.e., $15.00/12.90 -1 = 0.1623 = +16.23%).
So why are these call options buyers so bullish on LYFT stock? Let’s look at its free cash flow (FCF) and FCF margins.
Why LYFT Stock Looks Undervalued
The chart below from page 9 of Lyft’s supplementary data presentation shows that Lyft is generating large amounts of free cash flow (FCF). In the last 12 months ending Sept. 2024, it has produced $641 million in FCF.
In Q3 it generated $242.8 million in FCF, representing 16% of its $1.5222 billion in sales for the quarter. Moreover, the company forecast that it expects to make over $650 million in FCF in 2024.
That implies it could be over 11.2% of its estimated sales of $5.79 billion in 2024. My estimate is that FCF could be as high as $790 million, or 13.7% of sales. This assumes operating cash flow margins of just 12% in Q4 and 15.2% for all of 2024.
Moreover, next year analysts forecast sales of $6.60 billion in sales. Assuming a 16.0% operating cash flow margin (i.e., $1.056 billion in operating cash flow) and $101 million in capex spend, it could generate $955 million in FCF.
That works out to an FCF margin of 14.5% for 2025. This could push the stock higher.
Valuation Models
For example, using a 7.5% FCF yield model (the same as multiplying FCF by 13.3x), its market cap could rise to $12.73 billion. That is 2.38x its present $5.35 billion market cap.
In other words, the stock could be worth as much as $30.70 per share (i.e., 2.28x $12.90 per share today).
But just to be conservative, let’s say that the company makes just a 12% FCF margin next year. So, 0.12 x $6.60 billion in forecast sales = $792 million in FCF.
In addition, let’s use a 10% FCF yield metric, i.e., 10x FCF. That implies its market cap will rise to $7.92 billion (i.e., 10x $792 million FCF). This is still 48% higher than today’s market cap of $5.35 billion.
In other words, the most conservative value for LYFT stock is 48% higher at $19.09 per share.
Analysts agree. For example, Yahoo! Finance shows that 46 analysts have an average price target of $19.46 per share. That is close to my conservative valuation estimate. Moreover, Barchart’s survey shows a mean analyst target price of $19.00 per share.
Moreover, even AnaChart, which measures recent analyst stock recommendations, shows an average price target of $16.91 per share. That is still 31% higher than yesterday’s price.
So, every single analyst’s target price measure shows that LYFT stock is deeply undervalued.
The bottom line is that LYFT stock looks too cheap here. So, no wonder institutional investors are piling into call options that are just over 3 weeks away from expiration. They probably expect the stock to rise as it comes closer to the company’s Q4 earnings release date.
That is likely to be in the first week of February. That is close to the expiration date of these calls.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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