Uber, Lyft: Can Investors Expect the Stocks to Recover?

After touching new lows on September 3, Uber (UBER) and Lyft’s (LYFT) share prices gained 4.2% and 2.1%, respectively, on September 4.

Uber and Lyft stocks slid 5.7% and 7.2%, respectively, on September 3. The ride-hailing stocks were under pressure as California is set to vote on Assembly Bill 5. If passed, this bill would consider drivers of these ride-sharing companies employees instead of independent contractors. This bill intends to protect the interest of the drivers.

However, AB5 could hurt these ride-sharing firms, which are struggling on the profitability front. Already, investors are concerned about the timeframe for these two companies to become profitable.

According to CNBC, Uber and Lyft plan to spend $60 million on a California ballot measure that would retain the classification of the drivers as contract workers. Also, under the proposed ballot measure, the two companies would provide a minimum wage of $21 per hour and other benefits such as injured worker protection and paid sick leave.

Stocks down since IPO

On September 4, Uber stock has declined 23% since its IPO in May. Lyft stock has fallen about 41% since its March IPO. Both the companies declared their second-quarter results in August. Lyft declared better-than-expected second quarter results. In contrast, Uber fell short of expectations.

Lyft’s revenues surged 72% year-over-year to $867.3 million in the second quarter. A 41% rise in active riders to 21.8 million and higher revenue per active rider drove its top-line growth.

However, Lyft’s losses widened in the second quarter. Its adjusted EBITDA was -$204.1 million in Q2 2019 compared to -$190.5 million in Q2 2018. Nonetheless, the company raised its full-year guidance based on improved market conditions.

Lyft expects its 2019 revenue to grow 61%–62% to $3.47 billion–$3.5 billion. The company improved its loss forecast by $300 million and expects adjusted EBITDA in the range of -$850 million and -$875 million in 2019.

In comparison, Uber’s second-quarter revenue grew 14% to $3.17 billion. The company’s core ride-sharing business grew 2% to $2.35 billion. Uber Eats’ top line grew 72% to $595 million.

Uber’s adjusted EBITDA was -$656 million in Q2 2019 compared to -$292 million in Q2 2018’s second quarter. The company’s losses widened due to investments to support growth strategies. Uber expects its 2019 adjusted EBITDA to range from -$3.0 billion to -$3.2 billion.

Analysts’ recommendations for Uber and Lyft

Following the Q2 results, Wedbush upgraded its rating for Lyft to “outperform” from “neutral.” Wedbush also increased its price target for Lyft stock to $75 from $67. On August 26, Guggenheim raised its rating for Lyft stock from “neutral” to “buy” and assigned a price target of $60. On September 3, Zephirin Group lowered its rating to “hold” from “buy” and its price target to $67 from $91.

Lyft stock has a “buy” rating from 22 out of 35 analysts. Ten analysts have a “hold” recommendation while three analysts rate it a “sell.” On September 4, the 12-month average price target for Lyft stock was $74.19, which reflects an upside potential of 60%.

Currently, 21 out of 34 analysts have a “buy” recommendation for Uber stock. Also, 12 analysts have a “hold” recommendation while one analyst has a “sell” opinion. On September 3, Zephirin Group lowered its price target for Uber stock to $48 from $52. As of September 4, the 12-month price target of $51.23 for Uber stock reflects an upside potential of 60%.

Growth strategy

Lyft is focused on improving its ride-hailing business in North America. It is leveraging its existing business platform to seek new growth opportunities. During the second-quarter conference call, Lyft disclosed that it received approval as an enrolled Medicaid transportation provider in Arizona. Also, Lyft expanded its partnership with Disney and became the official rideshare of Walt Disney World Resort and Disneyland Resort.

Plus, Lyft raised prices on certain routes and in select cities based on costs and demand elasticities. This would help it move toward profitability sooner.

Aside from the ridesharing business, Uber is looking for growth in food delivery through Uber Eats. Uber, which has an international presence, is also expanding its Uber Freight business. While investors are closely watching profitability metrics, growth investments are expected to continue to weigh on the bottom line of both Uber and Lyft.