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Today HSBC (LON:HSBA) upgraded the outlook for Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) with a further 32 percent upside potential for Uber and about 35 percent one for Lyft relative to the current price levels. HSBC’s analyst Masha Kahn said in a note to investors that, “We think regulatory concerns are priced in, whilst we continue to see a lot of optionality around product improvements for both Uber and Lyft.” Accordingly, the bank sees the target price for Uber at $44 per share while that for Lyft at $62 per share. Interestingly, due to the overall negative industry sentiment, HSBC took the unusual action of raising the outlook while slightly reducing the target price of these two stocks from their previous levels – the former target price for Uber was at $49 per share while that for Lyft was at $67 per share. At the time of writing this article, Uber’s share price was up by 3.76% while that of Lyft was up by 5.51% on the back of this upgrade.
According to Kahn, the ride-hailing businesses exhibit 60% gross margins in the US and in excess of 70% internationally. Consequently, if Uber and Lyft were to curtail their respective sales and marketing expenses while concurrently focusing on product improvement and on leveraging their fixed cost base, these two companies can reach profitability. Kahn then goes on to cite the Russian ride-sharing company - Yandex Taxi - and the Chinese food delivery service - Meituan Dianping - as emblematic profitable enterprises in this challenging industry. In July 2019, Yandex Taxi reported a revenue growth of 117 percent on an annual basis with EBITDA of 423 Million Rubles. Similarly, in August 2019, Meituan Dianping reported an annual revenue increase of 50.6 percent while earning a second quarter profit of 875.8 Million RMB.
Despite the improved outlook, challenges abound for both companies. Over the past few months, Uber and Lyft have lost around 25 percent of their value as investors remained skeptical regarding growth prospects for both companies. Moreover, the increasingly stringent regulatory environment (read our extensive coverage here) has not improved the industry prospects. As a recap, the California State Legislature has recently passed the bill AB5 which is now awaiting the signature of Governor Gavin Newsom before it becomes law. As per the stipulations of the bill, temporary and contract employees will be granted social protections such as the minimum wage enforcement and unemployment benefits provided that such employees regularly work full-time hours and perform duties central to a business. For obvious reasons, this bill will result in profound negative implications for Uber and Lyft as these companies will be forced to provide minimum wage compensation to their drivers which, in turn, will significantly drive up costs in an industry environment characterized by stagnating growth.