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Uber Gains Another Bull: Profitability Concerns Easing?

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Uber (UBER) stock has been hammered since its debut on the markets in May. The stock is trading 26% lower than its IPO price of $45. Uber and its ride-hailing peer Lyft (LYFT) have been marred with profitability concerns recently.

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Profitability concerns for Uber and Lyft

Uber and Lyft offered huge discounts and incentives to drivers to gain market share. This strategy affected their profitabilities. However, now they’ve resorted to a more rational approach and are also doing aggressive cost cutting, including making layoffs, to rein in their cost structures.

Profitability and regulatory concerns for ride-hailing companies

Apart from profitability, these companies have also been at the receiving end as far as regulatory issues are concerned. In September, California passed Assembly Bill 5, which has the potential to alter their entire business models. Moreover, they chose to skip the congressional hearing meant to examine their labor and safety practices. The move angered lawmakers. Now, lawmakers are vowing for stringent controls of Uber and Lyft.

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Lyft addresses profitability issues

At the Wall Street Journal’s WSJ Tech Live conference, Lyft’s cofounders addressed the company’s profitability concerns. According to CNBC, the cofounders said the company could become profitable by 2021, a year earlier than analysts’ current consensus estimate. This projection led to a rally in Lyft stock.

Guggenheim initiates Uber with a “buy”

Uber has also been trying to address its profitability concerns by cutting costs. On October 25, Guggenheim analyst Jake Fuller initiated coverage on the stock with a “buy” rating and a target price of $40. As reported by MarketWatch, Fuller said Uber’s “underappreciated pricing leverage” and “growth-at-all-cost” outlook are easing in the ride-hailing industry. He added, “Challenges remain for sure, but we see Uber at a potential turning point.”

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Analysts turning bullish

Many analysts now reckon that these companies have already hit bottom and might be at their turning points. They’ve appreciated Uber’s recent cost-cutting efforts, incentive reduction, and focus on profitability. Moreover, they believe that legislative changes are mostly over with, and the bad news is more or less priced in.

Analysts have remained optimistic about both Uber and Lyft despite their disappointing performances. We talked about this in more detail in Why Uber and Lyft Have Analysts Feeling Positive.

Guggenheim on Lyft

In August, Guggenheim upgraded Lyft stock from “neutral” to “buy.” Guggenheim analysts predicted that the company would become EBITDA-positive in 2021 as opposed to their previous expectation of 2023. Read more about this in Lyft Stock Rises on Guggenheim Upgrade—More Upside?

Lyft’s and Uber’s third-quarter results could be the next significant catalysts for their stocks. Lyft aims to release its third-quarter earnings results on October 30. Uber is set to report its results on November 4.

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