Shares of Uber Technologies Inc. and Lyft Inc. received a boost Monday after HSBC analyst Masha Kahn turned bullish on both ride-hailing stocks, writing that the “price is right” to invest in the beaten-down industry.
Uber investors in particular are getting an intriguing deal in that the company’s Uber Eats business, Kahn wrote, saying it is essentially a “free” call option given the current stock price. A call is a type of option that gives the holder the right but not the obligation to own a stock at the current price.
Uber shares UBER, +3.55% gained 3.6% Monday, while Lyft’s stock LYFT, +3.67% increased 3.7%. Both stocks have struggled to live up to the prices commanded in their initial public offerings, closing higher than their respective IPO prices twice apiece in their months on the market.
After those struggles, Kahn now sees regulatory risks reflected in the stock prices and predicts that the companies will begin focusing on more profitable growth going forward. She projects that the ride-sharing aspect of these businesses has the potential to be “profitable at scale,” as do Uber’s food-delivery efforts.
She argues that the ride-haling segments can generate profits if Uber and Lyft cut sales and marketing expenses while leveraging their fixed-cost bases, as both companies appear to be attempting to do. Kahn sees the competitive landscape becoming more rational, which should help the companies pull back on driver and rider incentives.
“Looking globally, we point out that Yandex Taxi is already a profitable ride-hailing business and the largest food delivery company − China’s Meituan Dianping − just turned a profit,” Kahn wrote. “Both sectors are sensitive to marketing spend rationalization and we think peak incentives and losses are now behind Uber and Lyft.”
While Kahn cut her Uber price target to $44 from $49 in conjunction with the upgrade to buy from hold and decreased her Lyft target to $62 from $67, her new targets still imply more than 25% upside for each stock, even with Monday’s rally.
She does caution that the coming lockup expiration for Uber shares on Nov. 6 creates an “overhang” for the stock.
Uber and Lyft shares are both off 20% over the past three months, as the S&P 500 SPX, -0.31% has increased 3.8%.
