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Lyft Inc. (LYFT) stock keeps rising, which has also elevated its put options. This has been a boon for short sellers of out-of-the-money puts, especially in nearby expiry periods. Lyft's forecast of positive FCF could be positive for Lyft put short sellers, especially for existing shareholders.
I discussed this strategy in two previous Barchart articles and those following this would have made money, especially long investors in LFYT stock. For example, I discussed short-put plays in the March 6, 2024, Barchart article, “Unusual Activity in Lyft Put Options Highlights Its Underlying Value,” and the Feb. 17 article, “Lyft Makes Positive Free Cash Flow and Expects This for 2024 - Could Lift LYFT Stock 25% Higher.”
Today LYFT stock is at $20.28 before the market opens on March 22. My March 6 article recommended shorting the $17.00 strike price put for 41 cents or a 2.4% yield for today's expiry date. This put will likely expire worthless today, making that a good short play. That is especially the case for long investors in LYFT stock who also made a capital gain. A similar yield of 2.31% could have been made in the prior article.
In other words, it seems to make sense to repeat this trade. I will make a follow-on short-put play observation in a nearby expiry period. But first, let's review why LYFT stock still looks cheap and worth holding.
Free Cash Flow Positive This Year
Lyft reported in its Feb. 13 earnings statement it made $14.9 million in free cash flow (FCF) in Q4 2023 on $1.224 billion in revenue. Moreover, the company predicted that 2024 would be its first positive FCF year.
In my prior articles, I discussed how we could use this to set a price target, using EBITDA (earnings before interest, depreciation, and amortization) margin analysis.
For example, we know from Seeking Alpha that 37 analysts have an average forecast of $5.11 billion in revenue this year. Moreover, next year the average is $5.75 billion. So, sometime in the next 12 months (NTM) the average run rate for sales will be $5.43 billion.
Now, we can apply EBITDA and FCF margin analysis to this NTM revenue forecast. For example, its earnings statement said this:
“In terms of the magnitude, we expect that roughly half of Adjusted EBITDA will convert to Free Cash Flow for full-year 2024.”
So, working backward, if we estimate its EBITDA margin we can estimate its FCF margin. For example, in Q4 made a 1.8% adj. EBITDA margin (i.e., $14.9m/$1.224b revenue). In the prior quarter, its EBITDA margin was 2.6%. For the full year, it was 1.6%. These figures are on a table in its earnings release.
Setting a Price Target for LYFT Stock
Therefore, if we estimate that Lyft will produce an average of 2.2% EBITDA this year its EBITDA will be $112.4 million (i.e., $5.11b x 0.022). Applying this to the NTM sales estimate, the EBITDA could reach $120 million (i.e., $5.43b x 0.022 = $119.5m).
As a result, we can estimate its FCF will be around $60 million in the next 12 months (i.e., 50% x $120m). This is useful since we can use it to value LYFT stock.
For example, assuming LYFT paid out 100% of this as a dividend, the market might it at least a 0.60% dividend yield. After all, Meta Platforms now pays a dividend and has a 0.10% yield.
Using a 0.60% FCF yield will automatically “lift” LYTFT's market cap to $10 billion (i.e., $60m/0.006 = $10,000 million). This is 23.5% over its $8.1 billion market cap today.
In other words, LYFT stock could be worth 23.5% more sometime in the next 12 months, or $25.00 per share (i.e., $20.28 x 1.235).
This could be why the stock is rising. The bottom line is that it still makes sense for long investors to hold on. One way to encourage this, at least until it pays a dividend, is to sell short out-of-the-money (OTM) put options in nearby expiry periods (as discussed earlier). That produces income that can help shareholders stay long the stock.
Shorting OTM Puts
For example, look at the April 12 expiration period, three weeks away. It shows that the $19.00 strike price put options trade for 54 cents on the bid side. That strike price is 6.3% below today's price. Moreover, it produces a yield of 2.84% for the short seller of these puts (i.e., $0.54/$19.00).
Here is how that works. A short put investor first secures $1,900 (i.e., 100 shares per contract x the $19.00 strike price) for every put contract they intend to short for income.
For example, if they want to sell short 10 put contracts to make $54 (i.e., 54 cents per contract x 100 shares per contract), or $540, they must first secure $19,000 with their brokerage firm. The $540 in immediately received income works out to 2.842% of the $19K invested.
Moreover, if the investor can repeat this trade every 3 weeks for a quarter, they stand to make an expected return of almost 10% (i.e., 0.02482 x 4 = 9.928%). Keep in mind that the risk is that the stock falls to $19.00 sometime in the 3 weeks. The investor will then have the $19K secured with the brokerage firm used to buy 100 shares at $19.00.
But, of course, that might not be such a bad thing. After all, we have shown that the stock could end up being worth $25.00 sometime in the next 12 months. Not that there is any guarantee this will happen, this seems an appropriate way to make extra income. Moreover, the 10% in extra income over the next 4 repeated trades acts as a downside buffer. After all, I have already written two other articles showing that this was possible.
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.
