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HSBC Initiates Coverage on Uber Stock: A Long Way to Profits?

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  • HSBC initiates coverage on UBER with a “hold” rating.
  • Uber’s path to profitability may stretch due to price competition.
  • Regulatory factors also pose additional risks.
  • Uber Eats is in a disadvantageous position.

HSBC initiates coverage on Uber stock

Yesterday, HSBC initiated coverage on Uber with a price target of $49, a 12.2% upside over yesterday’s close of $43.69. The price target is above UBER’s IPO price of $45. However, HSBC analysts gave it a “hold” rating and warned that Uber’s path to profitability would be a long one. After its disappointing IPO, Uber stock has regained most of its lost ground but has remained below the IPO price, except on one occasion. HSBC analysts raised certain concerns regarding Uber’s profitability and the Uber Eats business. In spite of the news, Uber stock gained 1.18% yesterday while rival Lyft (LYFT) lost 2.15%.

UBER’s long path to profitability

Uber is battling severe price competition in key markets. Lyft offers rides at a significantly lower price point than Uber in NYC, while Daimler’s Bolt is also pricing its rides competitively in London. Elsewhere, Uber is battling regional and local players such as Softbank-backed Ola in India. Analysts mentioned that people are ready to wait longer for cheaper rides. If this trend continues, it will put pressure on Uber’s pricing and revenue growth. Uber will have to cut its prices, which would mean a longer wait for profitability. Fierce price competition has led to UBER’s exit from China and SE Asia.

On average, analysts surveyed by Thomson Reuters expect the company to post $1.5 billion in EBITDA level losses in 2021 with net losses expected to be close to $5 billion in that year. Since most of the surveyed analysts are bullish on Uber (22 buys and 11 holds), the losses may actually widen if the price war intensifies.

Regulatory headwinds

The price competition is not the only worry for ride-sharing companies. As the sector matures, we’ll likely see more regulations coming in, especially on the employment front. In the US, Uber is battling local regulators from California to New York on the employment status of its drivers. In some of its global markets, drivers have protested against Uber’s commission model.

Can Uber Eats get a bigger share of the pie?

HSBC also raised concerns on the Uber Eats business. In the US, Uber Eats is in a tight race with DoorDash and Grubhub. In India, it’s battling with homegrown Swiggy and Zomato. Not having the first-mover advantage in many of its markets puts Uber Eats in a disadvantageous position.

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