Billionaire David Tepper just increased his stake in this ride-hailing stock by 1,600%. Is it time to buy?

Whenever I’m looking for a new investment opportunity, one thing I enjoy doing is looking at hedge fund 13F filings. These documents break down the stocks that reputable investors bought and sold in a given quarter.

David Tepper of Appaloosa Management is an investor I like to follow. Last quarter, he bought 7.5 million shares of the transportation app Lyft (LYFT 2.71%)increasing its position by 1,600%.

Let’s dig into why Tepper might be intrigued by Lyft stock right now, and assess whether you should follow his lead for your own portfolio.

Ride-hailing is a great opportunity

According to data from Statista, the total global addressable market (TAM) for ride-sharing is expected to eclipse $200 billion by 2029. Considering one of the biggest value propositions of ride-hailing platforms such as Uber technologies and Lyft is the convenience these apps provide, it’s no surprise to see such an enormous market opportunity.

Moreover, ride-on platforms should continue to revolutionize the way consumers travel, given the growing interest in self-driving solutions. In the long term, self-driving cars should bring another level of efficiency to the transportation-as-a-service (TaaS) industry and serve as a catalyst for major players.

Image source: Getty Images.

Why would Tepper like Lyft stock?

The charts below paint a starkly different picture between Lyft and Uber. Uber’s revenue and free cash flow are multiples higher than Lyft’s. Additionally, Uber has been consistently profitable on a generally accepted accounting principles (GAAP) basis for some time.

One of the ways Uber was able to build such a commanding lead over Lyft was through a series of smart acquisitions, including alcohol delivery start-up Drizly and food delivery service Postmates. By diversifying its platform beyond its core taxi service, Uber is able to reach consumers on a deeper level by cross-selling its other products.

LYFT Revenue Data (Quarterly) by YCharts

Over the past three years, Lyft’s stock has fallen about 75%. Moreover, Lyft’s price-to-free cash flow (P/FCF) multiple of 13.5 pales in comparison to Uber’s P/FCF of 32.9.

The premium market valuation on Uber is a signal that most investors see the company as the superior player compared to Lyft. That said, I wouldn’t dismiss Lyft’s investment prospects simply because it’s a smaller operation compared to its rival.

One of the core traits of Tepper’s investments is that he looks for high-value opportunities — stocks that may be overlooked or written off as too risky and therefore trade at lower-than-usual valuation multiples. I think Lyft fits that criteria.

Should you buy Lyft stock right now?

Note that consumer spending has taken a beating over the past couple of years due to high levels of inflation and rising interest rates. Lyft’s business has become vulnerable as people cut back on travel plans and discretionary activities like going to a concert or dining out.

However, inflation has cooled in recent months. And more recently, the Federal Reserve finally cut interest rates for the first time in several years.

I see these economic indicators as positive and could spark renewed growth for Lyft. In fact, after posting flat results for bookings and rides in the fourth quarter of 2023 and the first quarter of 2024, Lyft’s latest earnings report showed notable growth on the platform.

As rides and bookings increased both from the first quarter and from the same period last year, so did the company’s operating margin and profitability profile.

If you’re thinking about investing in Lyft, I’d caution against getting too wrapped up in whether or not the company can break into Uber territory. In a way, Uber has turned into a completely different kind of company than Lyft. Through its acquisitions, Uber has built an end-to-end convenience-as-a-service offering and may deserve a premium valuation.

However, Lyft has finally begun to see a shift in demand trends that has sparked a notable acceleration in its top and bottom lines. Furthermore, I believe the company’s newfound profitability will allow Lyft to reinvest in the business more efficiently and should not be ignored when evaluating its investment prospects.

To me, Lyft stock is almost like a call option for the broader economic health. I think Tepper’s choice to buy Lyft stock in the second quarter will prove wise in the long run. Investors looking for opportunities in a large, growing market may want to consider a position in Lyft while the stock is still trading at bargain levels.