Uber and Lyft Get Upgrades as HSBC Sees 30%+ Upside

Today, CNBC reported that HSBC upgraded Lyft (LYFT) and Uber (UBER) stocks to “buy” ratings from “hold” ratings. Before we look at the HSBC’s rationale, let’s see how both these stocks have been trading since their IPOs this year.

Uber and Lyft stocks: Regulatory concerns overwhelm

The stock performances of ride-hailing companies Uber (UBER) and Lyft (LYFT) have been marred by several factors lately. The primary concern is their paths to profitability. The most recent issue that has troubled these companies is the bill passed by the California Senate. This bill, known as the Assembly Bill 5 (or AB5), will make it difficult for these companies to classify their drivers as independent contractors.

California law and ride-hailing businesses

This new bill will come down hard on the business models of companies such as Uber and Lyft. If these companies were forced to classify their drivers as employees rather than independent contractors, the impact could be devastating. However, Uber has tried to downplay the effect of this bill. According to CNN, a top Uber executive said, “Because we’ll continue to be responsive to what the vast majority of drivers tell us they want most — flexibility — drivers will not be automatically reclassified as employees, even after January of next year.”

Reclassifying drivers as employees could be potentially devastating for Uber and Lyft

If they have to classify the drivers as employees, they’ll have to provide the workers with minimum wage, paid time off, sick leave, and overtime. As reported by Quartz, Barclays estimates “that reclassifying workers could cost Uber and Lyft an additional $3,625 per driver in California.” Uber, Lyft, and DoorDash have pledged $90 million to overturn AB5. As per CNBC, these companies are also ready to provide drivers with additional benefits if they don’t have to reclassify them as employees.

Uber’s and Lyft’s losses since their IPOs

Regulatory concerns and well as profitability uncertainty have led Uber and Lyft to shed a significant value since their respective IPOs. Uber stock has dropped 26% from its IPO price of $45. Lyft, on the other hand, is down about 36% from its IPO price of $72. The major slowdown in their stock prices started after their second-quarter results. Lyft’s second-quarter results were better than Uber’s. Both companies, however, saw losses.

Analysts’ takes on Uber and Lyft

Many investors may be wondering if LYFT and UBER have bottomed out yet. Many analysts have provided their takes on the matter. Deutsche Bank initiated coverage on Lyft on September 5 with a “buy” recommendation and a target price of $70. The bank believes that Lyft’s stock is close to bottoming out. On August 26, Guggenheim also upgraded Lyft from “neutral” to “buy,” as its analysts believe that Lyft could become EBITDA-positive by 2021. They previously expected this break-even level by 2023.

As reported by Barron’s on August 27, Raymond James believes that Uber stock is looking cheaper as its economics improve. Uber is cutting costs aggressively in 2019 to return to profitability. On September 10, Uber announced another round of layoffs, wherein it let about 8% of its total workforce go.

HSBC upgrades Lyft and Uber stocks to “buys”

The most recent analyst rating for Uber and Lyft came from HSBC today. As reported by CNBC, HSBC upgraded both stocks to “buy” from “hold.” CNBC quoted HSBC analyst Masha Kahn as saying, “We think regulatory concerns are priced in, whilst we continue to see a lot of optionality around product improvements for both Uber and Lyft.” HSBC, however, followed up its “buy” recommendations on these stocks with target price cuts.

The reduced target prices are most likely due to the stocks’ recent sell-offs. The bank lowered the target price for Lyft from $67 to $62, which implies an upside of about 35%. HSBC also lowered its target price for Uber from $49 to $44. The new target price implies an upside of about 32% from yesterday’s closing price.

HSBC’s positive stance on these two stocks is the result of its view that the ride-sharing and food delivery businesses can become profitable for both companies, as per CNBC. HSBC also highlighted “higher regulatory risks and a lower longer-term growth outlook for their Rides businesses” as possible headwinds, according to CNBC.

Kahn sees Uber eats as a free call option for Uber investors

Market Watch cited Kahn as saying that Uber investors were essentially getting a “free” call option in Uber’s Uber Eats business. However, she’s also concerned about Uber’s upcoming lockup expiration period. Kahn thinks it could be an “overhang” for Uber stock, according to Market Watch. Investors should note that Lyft’s lockup period ended on August 19. After its stock saw a small sell-off, the lockup period expiration hangover for Lyft is over. For Uber, however, the hangover remains, as its lockup period ends on November 6.