Lyft's record fourth quarter and rosy outlook Tuesday were marred by what turned out to be a blunder in the company's press release — one that likely could have been avoided if the company had avoided the scary Wall Street jargon.
First, LYFT,
Setting a target that calls for 500 basis points (5%) of growth in its adjusted earnings before interest, taxes, depreciation, or amortization (Ebitda) margin. Lyft reported a 1.6% margin on the scale in 2023, so 500 basis points of projected growth suggests a 6.6% margin for 2024.
But that's not what Lyft is really about. On Lyft's earnings call, CFO Erin Brewer calmly corrected the number, saying Lyft expects margin expansion by 50 basis points. This would translate into growth of 0.5% and imply an expected margin of 2.1% for 2024.
The situation was confusing enough that one analyst used the question-and-answer portion to push for clarity on the difference between the smaller number shared in Lyft's prepared remarks and the larger number asked in the statement.
The rant shows the extent to which Wall Street relies on and perpetuates useless, mind-numbing jargon that ordinary retail investors may not quickly understand. This is another way the house wins.
Investors already have to grapple with the jargon in the description of the metric itself — EBITDA margin, which is calculated based on gross bookings, a term that includes the dollar value of transactions for which riders are charged.
Admittedly, people speak in basis points and percentage points to avoid other types of confusion that pure percentages may cause. A 0.5% margin growth forecast may be ambiguous – if investors add 0.5 to 1.6 [percent] Margin number for 2023, or do we multiply 1.6 by 0.5%?
But Lyft could have saved investors — and themselves — a major headache by simply doing the Wall Street math and setting an actual margin target for 2024, without dealing with basis points and growth rates. Doing so would have made it easier for the company to spot a number that didn't look quite right, and the fiasco might have been avoided.
Lyft executives were more than able to do that math, with Brewer sharing a 2.1% target on the earnings call. Why not simplify things for investors early on and give that number in the release as well?
As a result of the confusion, Lyft stock has seen extreme volatility. They surged nearly 60% at one point shortly after the release, but most of those gains evaporated once Brewer shared the correct target margin. The stock finished about 16% higher in the extended session.
Lyft has not yet responded to a request for comment, but the company has certainly been dealing with angry or perhaps angry investors.
It's not clear how long it took Lyft to actually issue the corrected press release, after the company verbally corrected the number on the call with analysts, and didn't even explicitly mention the new number as a correction until an analyst inquired.
The corrected press release on Business Wire has a timestamp of 6:02 PM ET, a little less than two hours after the initial release, but it's not clear if the company placed any other corrections between those two points. The company also had to correct its 8-K filing with the Securities and Exchange Commission.
Of course, X investors and speakers on CNBC were speculating that Lyft could be sued by investors for the blunder.
But Jake Walker, a Boston-based attorney who represents investors and consumers, believes such a case would be difficult to prove, based on his experience dealing with Affirm Holdings Inc. AFRM,
in 2022. He said on Show X that he represents investors who sued Affirm, alleging it issued an incomplete and misleading tweet about one set of quarterly earnings. The case was dismissed by a federal judge for failure to show intent.
“The complaint does not even come close to satisfying the PRSLA [Private Securities Litigation Reform Act of 1995] “Scientist requirement,” Judge Vince Chhabria of the Northern District of California wrote in a September 2022 ruling. “Scientist requirement” refers to a guilty state of mind or knowledge that an act is wrong and that there is an intent to act anyway.
“Indeed, the context (quickly removing the tweet and accelerating the earnings release) creates a more convincing inference that the company reacted quickly to correct an error that was embarrassing but not egregious,” the judge said.
Although Lyft's issue did not occur on social media, the company eventually corrected the error.
Will the street or corporate America learn from this episode? of course not.
Just as incomprehensible financial terms have always been an advantage for large companies, this tactic is also being adopted by companies, especially those keen to obscure or not achieve their financial results.
Lyft actually uses adjusted Ebitda, which isn't net earnings at all, but this scary thing has already been floated on MarketWatch.
Now, investors will be watching any fallout at Lyft to see if any heads turn as a result of one of the craziest earnings crashes in recent memory.
