Lyft will turn a profit by 2021, Guggenheim says in upgrade as shares rise

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The Lyft logo is shown on the screen at the Nasdaq offices in Times Square on March 29, 2019 in New York.

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Price increases will allow Lyft to turn a profit sooner than expected, according to Guggenheim.

The firm upgraded the ride-hailing company to buy and established a $60 price target. Lyft closed around $49 on Friday. Shares of Lyft popped more than 2% in premarket trading Monday

“We all underestimated how quickly the competitive mindset might shift under public ownership and how much leverage there is in the model to pricing,” Guggenheim analyst Jake Fuller said in a note to clients on Monday.

Since Lyft went public in March, followed by its biggest competitor Uber, investors’ biggest concern has been the companies’ path to profitability. Fuller’s initial concern about when Lyft will stem losses was that it could be tough to raise fare prices or cut driver wages in a competitive category; however, Lyft has surprised Fuller over the last two quarters by its pricing model.

Fuller said that Uber’s need for cash in the Uber Eats business and its push into more international ride hailing puts Lyft in a good position to raise prices alongside Uber.

“LYFT and UBER are now public, and UBER needs margin from U.S. ride hail to support efforts internationally and in the highly competitive restaurant delivery business,” Fuller said.

Guggenheim now expects Lyft to turn a profit in 2021 instead of 2023, mainly due to the price increases with limited impact on demand.

“Price increases should stimulate take-rate, bolster contribution margin and yield narrowing losses, with the potential for upside to consensus across key metrics,” said Fuller.

Shares of Lyft are down more than 30% since its initial public offering in March, while Uber’s stock is down 25% since its public debut in May.

— with reporting from CNBC’s Michael Bloom