Yesterday, CNBC reported that Deutsche Bank (DB) had initiated coverage of Lyft (LYFT) stock with a “buy” rating. Before we look at the rationale behind that rating, let’s compare Lyft stock with its close peer, Uber (UBER).
Uber and Lyft stocks are close to all-time lows
Lyft stock is down about 35% from its IPO price of $72. And on September 3, the stock fell to its all-time low of $45.42. Lyft and Uber have been marred by several issues lately, primarily their profitability. Currently, both companies are loss-generating businesses. Moreover, with their increasing competition, investors don’t see them reaching profitability anytime soon. Uber stock also hit its all-time low of $30.07 on September 3, nearly 32% below its IPO price of $45.
The latest negative news for the ride-hailing companies has been California’s Assembly Bill 5. Passed in the California Assembly in May and set to be voted on by the state Senate, the law would require ride-sharing companies to classify their drivers as employees rather than independent contractors. The change could be devastating to Uber and Lyft. As reported by Quartz, Barclays estimates “that reclassifying workers could cost Uber and Lyft an additional $3,625 per driver in California. That’s enough to boost Uber’s annual operating loss by more than $500 million and Lyft’s by $290 million.”
Pledging $60 million to a ballot measure
As both companies are striving to convince investors they can soon turn profitable, these additional costs could mean doom for their businesses. CNBC reports Uber and Lyft have pledged to spend $60 million on a California ballot measure for the 2020 election. This initiative would help them maintain drivers as contractors while providing them with more protection and benefits. The additional benefits would include a minimum wage of $21 per booked hour, injured worker protection, and paid sick leave, according to CNBC.
Uber’s and Lyft’s second-quarter results
Both Uber and Lyft saw losses in the second quarter, of $5.2 billion and $644 million, respectively. Their stocks saw a major sell-off after the companies’ Q2 results.
Uber reported disappointing second-quarter results with adjusted EPS of -$4.72, much lower than analysts’ expectation of -$3.12. Its top line grew 26% YoY (year-over-year), compared with 31% YoY in Q1.
Lyft’s Q2 results were better than Uber’s. Its revenue grew 72% YoY, surpassing analysts’ estimate. Its revenue per active rider also improved, and the company raised its guidance for 2019.
Deutsche Bank initiates coverage of Lyft, recommends “buy”
Many investors may be wondering if LYFT and UBER have bottomed out yet. When Deutsche Bank initiated coverage of Lyft yesterday, it tried to answer this question. According to CNBC, DB analyst Lloyd Walmsley recommended “buy” for LYFT stock and set its target price at $70, which implies a 51% upside based on its closing price yesterday.
CNBC reports Walmsley wrote, “We initiate coverage of Lyft with a Buy rating and think the stock may be bottoming. The company reported robust 2Q results, and yet the stock has been weak.” He also seems unfazed by concerns over Lyft stock and believes they are overblown, reports CNBC. It reports Walmsley said, “We think the recent sell-off in Lyft’s shares presents an attractive entry point, particularly for longer-term investors who can stomach a period of volatility given the uncertainty around when the market will start to give the company credit for an improving ramp towards profitability.” Guggenheim also upgraded Lyft from “neutral” to “buy” on August 26.
To keep investors interested, Uber and Lyft need to show they have concrete goals and are making steps to achieve them. During Lyft’s second-quarter earnings call, CFO Brian Roberts said the company had started raising prices at some locations based on demand at the end of June.
Such actions could be a major step toward profitability, which still seems far off for the company. CNBC reports Guggenheim analysts believe Lyft could become EBITDA-positive by 2021. They had previously set that date at 2023 but adjusted it based on Lyft’s fares and falling incentives.
Uber is also rethinking its path to profitability. Barron’s reported on August 27 that Raymond James analyst Justin Patterson thinks Uber stock is looking cheaper as the company’s economics improve. Uber has also been cutting costs to manage profitability.
IPO lock-in period expiration
One additional concern remaining for Uber is its IPO lock-in period expiry. On August 19, Lyft’s lock-in period ended, more than a month before it was set to expire. The stock saw very a mild sell-off, which came as a relief for investors. For Uber, however, lock-in ends on November 6. Early investors could use this expiration to exit the stock if the company can’t convince them of its long-term profitability.