Confetti falls as Lyft CEO Logan Green (C) rings the Nasdaq opening bell celebrating the company’s initial public offering (IPO) on March 29, 2019 in Los Angeles, California.
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Lyft’s recent troubles are priced into the company’s stock and now is a good entry point, according to Deutsche Bank.
The firm initiated coverage of the ride-hailing company on Thursday with a buy rating and a $70 price target, implying about 50% upside for the stock. Share prices popped 3.5% in Thursday’s premarket to reach $48.
“We initiate coverage of Lyft with a Buy rating and think the stock may be bottoming. The company reported robust 2Q results, and yet the stock has been weak,” Deutsche Bank’s research analyst Lloyd Walmsley said in a note to clients.
Shares of Lyft have cratered more than 35% since its initial public offering in March on fears about profitability, regulatory scrutiny, an early release from the IPO lockup and whether ride-sharing is a good business. Lyft, and its biggest competitor Uber, closed at all-time lows on Tuesday, weighed down on these fears, but Walmsley says the concerns are overblown.
“We think the recent sell-off in Lyft’s shares presents an attractive entry point, particularly for longer-term investors who can stomach a period of volatility given the uncertainty around when the market will start to give the company credit for an improving ramp towards profitability,” said Walmsley.
Last month, Lyft said it lost $644.2 million in the second quarter, representing a significant jump from the $178.9 million it lost a year earlier. A decreased appetite for unprofitable companies is hurting the companies shares.
Walmsley isn’t worried about Lyft’s losses and said “a rational duopoly in the US makes Lyft a good business today, and improving efficiency should drive healthy long-term margins.”
A proposed California law could also represent a major threat to Lyft’s business model should it pass through the state Senate, as it would force the companies to reclassify their drivers as employees. But again, Walmsley is not worried.
“In a worst-case scenario, we see Lyft raising prices and passing along the cost to riders and creating a slight drag on growth in CA (probably ~20% of Lyft bookings),” said Walmsey.
Lyft’s lockup on nearly 90% of its shares expired last month, but Walmsley said “the bulk of the lockup pain is in the shares at this point and should not be an incremental drag on the shares.”
Walmsey said he liked Lyft as a “pure play” on ride sharing in the U.S., where the overall market is becoming more “rational.”
— With reporting from CNBC’s Michael Bloom