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Citi Upgrades Uber Stock: Risk-Reward Favorable

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Today, Citigroup (C) upgraded Uber (UBER) stock from “neutral” to “buy.” However, the firm kept its target price for the stock unchanged at $45. This target implies a potential upside of nearly 52% compared to Uber’s last closing price.

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Uber and Lyft stocks’ dismal performance

Uber stock has fallen about 34% from its IPO price of $45. There are many regulatory and profitability concerns surrounding ride-hailing firms, particularly Uber and Lyft (LYFT). Lyft stock has seen a drop of 46% from its IPO price of $72. On October 2, both stocks hit their all-time lows.

Concerns regarding ride-hailing firms: Assembly Bill 5

The latest concern regarding these stocks was the introduction of Assembly Bill 5 (or AB5) in California. According to this bill, these companies could be required to classify drivers as employees rather than as contractors. This reclassification could mean a drastic shift to their original business models and even lower margins.

A June 14 report by Quartz noted that “equity research analysts at Barclays estimated 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.

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Lockup period expiration: Another hangover for Uber stock

Another obstacle for Uber stock is that its lockup period is expected to expire on November 6. 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. Early investors can use this expiration period as an opportunity to exit the stock, which could further pressure the stock.

Citi upgrades Uber to “buy”

Citi upgraded Uber stock despite the concerns, saying that despite these concerns, it sees more clarity for the stock. According to MarketWatch, Citi analyst Itay Michaeli said the company’s upcoming Q3 results, “could provide a window to refocus the story on improving fundamentals.”

He added, “With revenue growth also expected to accelerate in H2, the Q3 earnings report could be enough to swing forward sentiment more favorably to some extent, even as overhangs like AB5 and the lock-up persist.”

Uber stock was trading higher by 2.6% at 9:34 AM EDT after Citi’s upgrade. At that time, Lyft was trading up by 1.8%.

Analysts are positive on Lyft and Uber stocks

Despite ride-hailing firms’ poor stock performance in recent months, analysts have remained positive about them overall. We discussed this in more detail in Why Uber and Lyft Have Analysts Feeling Positive.

Uber and Lyft have “buy” ratings from 60% and 63% of the analysts covering them, respectively. Also, Uber and Lyft have upside potential of 67% and 83%, respectively, based on analysts’ average target prices. 

Recently, MKM Partners initiated Uber and Lyft with a “neutral” rating. While MKM is positive on the fundamentals of secular tailwinds for the stock, it is concerned about the near-term negative catalysts.

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