Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
In March 2019, Lyft (NASDAQ:LYFT) held its IPO -- and suddenly, it was off to the races for publicly traded ridesharing companies. A little over a month later, archrival Uber (NYSE:UBER) followed suit with its own offering.
Neither event was particularly successful, and both stocks still trade below their initial offering prices today. On the plus side, for investors who kept their wallets in their pockets throughout the initial turbulence, these broken IPOs may now offer a better chance for profit than they did at their debut prices...
...or so says Evercore ISI.
An analyst in the know
Although not exactly a household name on Main Street, Evercore ISI helped to underwrite both the Uber and the Lyft IPOs. Unlike most of its fellow underwriters, however, Evercore has kept quiet on the companies' prospects -- until now.
Late yesterday, Evercore broke its silence, and issued outperform ratings on both Uber and Lyft. Let's address them one at a time.
Lyfting the price to $74
Lyft stock went public at $72 a share, and Evercore believes it could exceed that within a year, setting a target price of $74. As the analyst explains, Lyft is a "pure play beneficiary of the increasingly powerful demographic and secular tailwinds within [North American] ridesharing, which is disrupting the $1.2T US auto transportation market."
It's also a leader in ridesharing, with Evercore predicting Lyft's revenue will grow at "1.5x+ the industry bookings rate through '25 or a 23% CAGR" -- and potentially as fast as 30% to 35% per year over the next three years.
Admittedly, even Evercore doesn't see profits in Lyft's future before 2022 at the earliest. But as the analyst points out, positive earnings in 2022 would mean the company turns profitable one full year before most analysts expect it to. (Before you get too excited, though, you should know that S&P Global Market Intelligence estimates show consensus projections giving Lyft "normalized" earnings of $0.48 per share in 2023. In other words, Evercore is probably only predicting pro forma profits for Lyft in 2022 -- not true GAAP profitability.)
Going Uber and above mere ridesharing
As much as Evercore loves Lyft (and predicting a 28% gain in share price over the next 12 months, it does love Lyft a lot), this analyst seems to love Uber even more. Evercore's $60 target implies something closer to a 40% gain over Uber's current share price.
Why is that?
Whereas the analyst sees Lyft as a ridesharing "pure play," it believes that Uber offers investors something a bit broader in scope: a software "platform as a product" that the company can parlay into a means of ordering all sorts of transportation services. This might include, for example, ordering food delivery from Uber Eats, freight deliveries by truck, entirely "autonomous" taxi service via driverless vehicles, and other services yet to be thought of. In Evercore's estimation, this broader range of service offerings could enable "diversified growth at scale" for Uber.
Granted, there would seem to be no obstacle to Lyft transforming its ridesharing software to permit similar service orderings, but for now, this doesn't seem to be the direction that it's going in.
Benefits for both players in a duopoly
Still, Evercore sees trends that will work to Lyft's benefit, as well as Uber's, even if Lyft sticks to its current ridesharing-only lane. Already, the analyst believes it is seeing evidence of a "quietly improving pricing environment" (i.e., higher prices for ridesharing users) and "incentive maturation" (i.e., ridesharing companies offering fewer free rides and discounts).
In short, while the "debut" of both stocks has been a bit "rocky" so far, higher prices and lower costs to subsidize services hold the potential to turn both of these companies profitable sooner than many analysts expect.
Is Evercore's expectation reasonable? Only time will tell. What I know today is that Evercore is only one voice out of a pack of 29 separate firms that underwrote the Uber IPO (for example). And while Evercore's prediction sounds promising, the consensus of all the other analysts following the stock is that Uber won't earn even a pro forma profit before 2024 at the earliest -- and GAAP profitability could take even longer than that.
I don't know about you, but waiting more than half a decade for an investment to start earning money requires more patience than I can muster. Evercore's recommendation notwithstanding, I simply cannot bring myself to call either of these stocks a buy.