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Uber, Lyft can reach profitability: HSBC

Shares of Uber (UBER) and Lyft (LYFT) started the week in the green after a bullish call from HSBC. In a note to investors, the firm upgraded both ride-hailing companies to Buy on lower subsidies and potential product innovation, contending that “the price is right to take the ride.”

“We believe both Lyft and Uber will have to address inefficient cost structures and focus on profitable growth. Higher prices, lower subsidies and slower growth in bookings will likely be the new normal, but these changes should help reduce losses over the next several years,” wrote HSBC analyst Masha Kahn.

Despite the hype surrounding the market debuts of both companies, many analysts have questioned whether they will ever be profitable. However, HSBC notes that on both fronts, management’s rhetoric has become more focused on the path to profitability and costs.

“When backed by private capital, Uber and Lyft had the luxury of focusing on growth, now both are rethinking capital allocation. Being a public company has led to rationalization of competitive behavior in the U.S. ride-hailing sector,” added Khan.

In its most recent earnings call, Lyft cofounder and CEO Logan Green called its Q2 “a milestone quarter” in its path to profitability. Similarly, Uber CFO Nelson Chai told investors the company continues “to focus on balancing investments and profitability improvement” and that “profitability of the rides business will prove out.”

For Uber specifically, HSBC believes that investors are essentially getting a “free” option on Uber Eats at the current share price. The firm says it sees “signs of rationalization of Uber Eats’ global footprint, which should help reduce losses from markets that are very competitive (India and South Korea) and focus on markets where growth opportunity is more attractive (Japan, Middle East and Latin America).”

An Uber Eats food delivery courier pulls a bicycle in central Kiev, Ukraine September 9, 2019. REUTERS/Valentyn Ogirenko

Digging deeper into the food delivery space, HSBC points out that despite competition, there are some names turning a profit. Notably, ride-hailing company Yandex Taxi and food delivery company Meituan Dianping in China. Analysts at the firm single out players such as Grubhub (GRUB), Delivery Hero (DHER.DE) and Just Eat (JE.L), which have outperformed Uber and Lyft in the last 3 months.

Despite HSBC’s bullish call on Uber and Lyft, the firm lowered its target prices on both stocks by $5. The firm now has a $44 price target on Uber shares, and $62 on Lyft. Both imply more than a 30% upside.

Looking ahead, Uber’s lock-up period is set to expire on November 6. Lyft’s lock-up period was scheduled to end on September 24, but was unexpectedly moved up to August 19.

Pamela Granda is a producer for Yahoo Finance's live closing bell show, The Final Round. More from Pam:

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