Can Uber and Lyft Shift Out of Neutral?

MKM Partners initiates coverage of the two ridesharing companies with ho-hum ratings. It’s all about timing.

| More on:

The good news for beleaguered Lyft (NASDAQ: LYFT) and Uber (NYSE: UBER) investors is that an analyst is initiating coverage of the ride-hailing duopoly. The bad news is that MKM Partners is rolling out coverage with neutral ratings on both stocks. MKM Partners is slapping a price target of $32 on Uber and $45 on Lyft.

The new price goals are much lower than each stock’s IPO price. Uber went public at $45 in May. Lyft hit the market at $72 two months earlier. Thankfully for investors thinking about initiating a position in one or both companies, the new analyst price targets offer some implied upside from current levels, with both stocks hitting new all-time lows on Wednesday. MKM Partners’ price goals are 10% ahead of where Uber closed on Wednesday and 17% above where Lyft is currently perched.

At a time when there has been little to get excited about either company for existing shareholders, this will have to do as a relative positive development.

Losing money as ridership grows

Timing is the key to investing in IPOs, and it’s fair to say that Uber and Lyft could’ve been market darlings had they gone public a year ago, or maybe two years from now. The two companies that dominate the personal mobility app market are in an undeniably growing niche, and even as growth understandably decelerates, they are both cranking out hearty double-digit revenue gains.

Bookings soared 31% in Uber’s latest quarter, and Lyft is growing even faster. The 72% top-line pop that Lyft posted in the second quarter was more than what any of the 30 analysts covering the stock were expecting. Both companies are losing a lot of money, and that is why the market has kicked both stocks to the curb. It’s just not fashionable to go public without a clear path to profitability, and the same process that shelved the WeWork IPO last month is also weighing on the 2019 debutantes that managed to sneak in under the wire.

None of this suggests that Uber and Lyft are perfect. Uber’s revenue and net adjusted revenue are running at less than half of its gross bookings rate as it shells out more money to its drivers to keep them incentivized. Lyft doesn’t have the same profit-mauling ventures like Uber Eats or the push to move its mobility app overseas, but Uber’s smaller rival is still years away from turning the corner on the bottom line.

California is also about to make things harder for Lyft and Uber by requiring them to reclassify drivers as employees instead of independent contractors as early as next year, a move that will either force rates in the country’s largest state higher or dig the ridesharing duo into a bigger deficit hole.

In a different investing climate, growth investors would be eyeing the booming popularity of the platforms favorably and betting on the transportation industry’s disruption. Right now, it’s just a matter of exhaling when an analyst initiates coverage and simply settles for a neutral rating.

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool recommends Uber Technologies. The Motley Fool has a disclosure policy.

More on Tech Stocks

diversification is an important part of building a stable portfolio
Tech Stocks

Here’s What I’d Buy With a $20,000 Portfolio This Year

Understand the importance of reviewing stocks annually to navigate business cycles and optimize your investment strategy.

Read more »

senior couple looks at investing statements
Dividend Stocks

1 RRIF Withdrawal Could Trigger a Much Bigger Tax Bill Than You Expect

A big RRIF withdrawal can trigger a double hit from income tax and an OAS clawback, so planning matters.

Read more »

concept of growth
Tech Stocks

BlackBerry Stock Already Rallied: Here’s Why the Best Gains May Still Be Ahead

BlackBerry just ripped nearly 20% higher on a strong quarter, but investors still need proof the turnaround can last.

Read more »

man looks worried about something on his phone
Dividend Stocks

The Market Has Punished This Dividend Giant Enough: I’d Buy Before Sentiment Turns

BCE’s dividend cut scared investors away, but the smaller payout may now be safer and leave room to repair the…

Read more »

Data center woman holding laptop
Dividend Stocks

Canada’s Data-Centre Buildout Has Already Begun: These Stocks Could Be Next

Canada’s AI data-centre buildout is creating investable demand for electricity and electrical equipment, not just chips.

Read more »

dividends grow over time
Tech Stocks

If You Missed Shopify’s First Run, Don’t Ignore These 2 Canadian Growth Stocks

Two Canadian growth stocks may be building the kind of compounding “flywheel” that once made Shopify a legend.

Read more »

technology moves fast
Tech Stocks

This Stock Is Still Deep in the Red, but the Business Has Already Turned

Lightspeed’s stock is still down 90% from its peak, but the business is starting to look like a real turnaround.

Read more »

young adult uses credit card to shop online
Tech Stocks

A $7,000 TFSA Contribution Could Become $70,000: Here’s Why I’d Invest It Now

Waiting for the “perfect” TFSA buying moment can cost you years of compounding, especially with a long-run growth stock like…

Read more »