Today, Lyft (LYFT) stock was up about 3% at 10:10 AM ET after Guggenheim upgraded it from “neutral” to “buy.” As per CNBC, Guggenheim analysts Jake Fuller and Ali Faghri said in a note to clients today, “We all underestimated how quickly the competitive mindset might shift under public ownership and how much leverage there is in the model to pricing.” Lyft’s target price of $60 implies a potential upside of 22% based on yesterday’s closing price.
Guggenheim’s previous concerns
Guggenheim started covering Lyft stock in April and initiated on it with a “neutral” rating. Fuller and Faghri’s concerns about the stock were about the company’s path to profitability and high costs. According to MarketWatch, he wrote, “We see four paths to profitability: cut driver pay, turn off incentives, reduce insurance costs or shift to self-driving cars.” He added, “The first two would be tough in a highly competitive category, the third might not be enough by itself and the fourth is likely 10 years out.”
Lyft’s price increases according to demand elasticities
On August 7, Lyft announced that it began raising prices at some locations at the end of June. On its second-quarter earnings call, its CFO, Brian Roberts, said, “Our guidance incorporates modest price adjustments that went live towards the end of June. More specifically, we began to adjust prices on select routes and in select cities based on costs and demand elasticities. We expect that these changes will accelerate Lyft’s path to profitability.”
This comment implies that the company is only raising prices on routes where demand elasticity is low. So either higher prices won’t dissuade customers from still taking rides or the losses from such instances will be more than offset by the increase in fares overall.
Price hikes positive for ride-hailing businesses
This is positive for the ride-hailing business overall. Analysts and investors were concerned about the path to profitability for Uber (UBER) and Lyft. These companies have been undercutting the competition by trying to lure customers through discounts, impacting their profitability. In 2018, while Lyft’s revenue more than doubled, its earnings worsened.
Guggenheim sees profitability in Lyft earlier than previously expected
Another factor that turned Guggenheim around for Lyft stock was its cut in incentives for drivers. As per a CNBC article posted earlier today, Guggenheim wrote, “With fares rising and incentives falling, we now expect LYFT to be EBITDA positive in 2021 (prior 2023) and get to $1.5B by 2023.” Fuller and Faghri said, “Price increases should stimulate take-rate, bolster contribution margin and yield narrowing losses, with the potential for upside to consensus across key metrics.”
Fuller and Faghri also compared Lyft to its ride-sharing competitor Uber. He said, “LYFT and UBER are now public, and UBER needs margin from U.S. ride hail to support efforts internationally and in the highly competitive restaurant delivery business.”
Lyft went public in March 2019. Since its IPO, its stock is down about 30%, mainly on profitability and rising competition concerns. In comparison, the S&P 500 and the Dow Jones Industrial Average are down 0.3% and 2.3%, respectively, in the same period. Uber, which debuted on the market through an IPO at $45 per share in May, has since fallen 25%.
How Lyft and Uber fared in the second quarter
Uber reported disappointing second-quarter earnings results on August 8. It reported lower sales growth in the second quarter than in the first quarter. Most of the stock’s losses came after its weak earnings report.
Lyft reported strong revenue growth in the second quarter. The company also raised its guidance for 2019.
Expiration of Lyft’s lock-in period and removal of a hangover
Lyft’s lock-in period ended on August 19, more than a month before it was previously set to expire. According to the company’s press release on August 7, it had advanced the period to end on August 19 to avoid a clash with the quarterly blackout period. While the market expected a major sell-off in the stock on the expiry of the lock-in period, it saw a softer-than-expected fall. This strengthened investors’ and analysts’ outlooks.
JPMorgan Chase (JPM) also gave positive commentary on Lyft after its lock-up hangover ended. As reported by The Fly, “JPMorgan analyst Doug Anmuth said management’s overall tone was very confident and he came away incrementally positive on the stock.” JPM’s analyst maintained an “overweight” rating and a $90 target price on the stock.
Currently, 35 analysts cover Lyft stock, as per Thomson Reuters. Of these analysts, 63% have “buys,” 31% have “holds,” and 6% have “sells” on the stock. Its target price of $74.6 implies an upside of 52% to its current market price.
Update: An earlier version of this article mentioned only Jake Fuller and not Ali Faghri. LYFT is co-covered at Guggenheim by both Jake Fuller and Ali Faghri (with equal billing).