Lyft Behind: How the Market is Crushing Uber and Lyft

Dear Traders,

The earnings season is still going wild this week. The ridesharing companies are the latest prey of the bear market. Lyft collapsed over 40% amid reports of a struggle to find drivers. Uber couldn’t escape from the bears either, now down over 10% as of the writing of this newsletter. AMD reported earnings and gapped up over 8% in the premarket, but the bear market crushed it in such a way that, as I am writing, it has lost all of its morning gains. Brian traded Lyft exclusively, and I traded AMD only. We both had amazing days! You can watch our recap here.

Today’s Global News and Financial Recap

The Uber and Lyft business models are now serious concerns. The primary purpose of ride-hailing, getting customers a driver in minutes at low prices, falls down pretty hard if riders have to wait 15 or 20 minutes for a driver, which is why both Uber and Lyft are offering financial incentives to attract new drivers. That is a reasonable strategy, but it’s concerning when their economics weren’t stacking up to begin with. The last 17 quarters have seen Lyft burn through more than $6.8 billion — a staggering amount for a company that has never really recovered fully from the pandemic.

Today is a big day. It’s decision day at the FOMC: the rate decision is due at 2pm ET and Chair Jerome Powell is delivering a press conference starting at 2:30pm ET. The Federal Reserve is all set to raise rates again, with most economists expecting a 0.50% increase to fight an inflation that is running at the fastest pace in decades. Unlike the meeting in March, we won’t get an update of the dot plot or a summary of projections, which means that much of Wall Street is now looking at Powell’s post-meeting remarks to get a clue for the next steps.

The war in Eastern Europe is still raging and the European Union has proposed to ban Russian crude oil over the next 6 months and refined fuels by the end of the year. Member states will meet today to discuss — and potentially approve — the proposal, which would be the bloc’s 6th set of sanctions targeting Russia. The EU is also proposing to cut off Sberbank and other lenders from the international SWIFT payment system.

At Bear Bull Traders…

Today, for Wednesday Psychology, Dr. Reid is heading up a very nice presentation titled: The Humble Trendline. It starts at 8pm ET.

Ardi gave a very well-attended webinar on Implied Volatility Demystified last night and the recording is now available for all Elite members. If you are not an Elite member, do make sure to upgrade your account.

And Finally…

Ardi and I were recently discussing who would be the new leader of the next bull market. The technology companies represented in QQQ were the leaders of the previous big bull market. But the collapse of Netflix, Amazon, FB, NVDA, and now AMD raises the question as to which companies will lead the next bull market. High beta tech stocks that have most of their cash flow projected in the future are not doing well in this era of financial tightening and rising interest rates. The global and US economies are now under pressure by the biggest global tightening cycle in at least 15 years. Add in a war in Europe and massive chaotic lockdowns in China due to COVID-19 and you have the makings of a new era for the markets.

But which group of companies will be the new leader? I wish I knew. If you go to our Trading Terminal and look at iShares US sector ETFs, the first thing you notice is that every sector is down from their all-time highs. Besides the energy sector, which is strong because of the war, consumer staples are faring the best, which means investors are looking for safe havens and not for the next big company. There’s a rank order that has developed and the prior technology leaders (read QQQ) are at the back of the queue. It goes like this:

In the middle of the tightening, a lot of tech companies do not look attractive anymore. Netflix is a case in point, having already lost more than 70% of its value. Why would you get right back into an investment you lost your shirt on with no end in sight? You wouldn’t. People are squeamish about getting leveraged to investments that just burned them. ARK Innovation ETF peaked at $130 per share and now is trading at $48. Owners of the fund have to ask themselves whether it is ever a good idea to hold onto an investment through a 70% drawdown. Investors of many other high beta companies such as Chewy, Robinhood, and Beyond Meat should be asking themselves the same thing, as should the owners of meme stocks like AMC and GameStop. These shares have a mountain to climb to get back to previous highs. With the Federal Reserve about to start jumbo rate hikes, the mountain will be that much steeper as the value of future cash flows starts to suffer.

The technology sector is dead, thanks to persistent inflation and the Federal Reserve. But that doesn’t mean a company like Apple or Google (which were market leaders in the last bull market) can’t do reasonably well in the years to come. Maybe they will become the equivalent of Disney, or AT&T, or Chevron: not really growth stocks but also not market leaders either.

I am sure we all have heard “The king is dead, long live the king!” in old movies, meaning a passing of the baton from one leader to the next. The next bull market is looking for its leaders, probably value stocks, the kind of companies Warren Buffett likes. Companies that benefit from inflation, such as Costco and Walmart, are at all-time highs. We shall see what happens in the next 6 months. On average, a bear market lasts about 260 days. Since the current one began in February 2022, we still have a long way to go to reach the end of it. How many more tech companies will be crushed by the bear? We shall see.

To your success,
Andrew

PS1: If you have not already, I urge you to try out our free web-based trading simulator at stocktradingsimulator.com. It’s conveniently available 24/7, whenever you have time to practice honing your trading skills.

PS2: If you are not yet an Elite member, I hope you will take advantage of our “Hello Spring” promotion. You will find the details here. You will receive 50% off the price of an Elite annual membership and in return you will gain access to all of our excellent educational and training resources.