Lyft may reach profitability sooner than expected.
Lyft’s price increases may help the company become profitable sooner than many anticipated, according to Guggenheim.
As a result, the investment firm has upgraded Lyft to ‘buy’ with a price target of $60. After closing at $49 on Friday, Lyft stock jumped by about 4% on Monday. The price target is around 20% higher than Lyft’s current share price.
This comes just months after Lyft’s recent IPO. At that time, Guggenheim took a neutral stance on the company’s stock, stating, “We simply have to look too far out with too many big assumptions in order to make a case for the stock.”
Regarding Lyft’s need to increase revenue, Guggenheim analyst Jake Fuller previously stated, “We see four paths to profitability: cut driver pay, turn off incentives, reduce insurance costs or shift to self-driving cars. The first two would be tough in a highly competitive category, the third might not be enough by itself and the fourth is likely 10 years out.”
After going public at $72 per share, Lyft’s stock has seen a series of ups and downs. Investors have remained cautious largely due to concerns over Lyft’s potential to turn a profit.
But with this new rating, investors’ opinions of the stock may start to shift.
Lyft Hikes Prices
Like its primary competitor Uber, Lyft has continued to struggle to turn a profit. In an effort to address this issue, the company decided to change its pricing model to increase revenue.
Guggenheim analysts Jake Fuller and Ali Faghri wrote, “We all underestimated how quickly the competitive mindset might shift under public ownership and how much leverage there is in the model to pricing.”
While the analysts previously thought it would be difficult for Lyft to raise prices to stay competitive, Uber’s need for cash could pave the way for Lyft to increase its fare prices alongside its competitor.
Guggenheim now expects Lyft to reach profitability in 2021 rather than 2023 and to get to $1.5 billion by 2023.
According to CNBC reporting, Fuller and Faghri stated, “Price increases should stimulate take-rate, bolster contribution margin and yield narrowing losses, with the potential for upside to consensus across key metrics.”
Lyft’s Recent Earnings Report Shows Promise
Though profitability concerns remain, Lyft’s second-quarter earnings presented promising results.
In the report, the company revealed strong sales and revenue numbers in addition to an increase in active riders, demonstrating sufficient demand for the ride-hailing service. While prices stagnated after the report, it served to increase investor optimism regarding the future of the company.
During the company’s second-quarter earnings call, CFO Brian Roberts addressed the price changes, saying, “Our guidance incorporates modest price adjustments that went live towards the end of June. More specifically, we began to adjust prices on select routes and in select cities based on costs and demand elasticities. We expect that these changes will accelerate Lyft’s path to profitability.”
Despite these positive catalysts, Lyft shares are down more than 30% since its IPO. In contrast, Uber shares are down by around 25% since its IPO in May.
