Lyft, Uber Regulatory Hurdles Keep This Analyst On The Sidelines For Now

MKM Partners started coverage of the two rideshare giants, Uber Technologies Inc. UBER and Lyft Inc LYFT with Neutral ratings, citing regulatory uncertainty in the still developing industry.

MKM's Rohit Kulkarni initiated coverage of Uber a price target of $32 and started its competitor Lyft with a $45 price target. In both cases, the potential for regulatory headaches, particularly in California and New York, is keeping Kulkarni sidelined.

A big issue facing both companies is recently-passed AB5 in California, which could require app-based gig companies to treat contractors more like regular employees with benefits.

Also on the watch list before MKM can get more bullish is the situation in New York, where limits on drivers and minimum wages are similarly under consideration.

Related Link: Uber's App Overhaul Distracts From Its Slow Revenue Growth

Lyft With Higher Target

While Lyft is the No. 2 player in the market now, it has innovated faster than Uber, Kulkarni said. And, Lyft has been gaining market share in North America and could do the same elsewhere, all while taking clear steps toward profitability.

Kulkarni also likes Lyft's insurance subsidiary, which he said "could be part of its secret sauce to reach profitability."

Lyft has significant market opportunity moving toward rational competitive pricing, Kulkarni said. Still, he expects Lyft to continue to burn cash for another 30 months, another factor that keeps him Neutral.

Uber Double Negative

Uber "benefits from powerful, secular tailwinds and its market leadership and scale advantage will likely enable it to capture an asymmetric economic value in the global mobility ecosystem over the longer term," Kulkarni wrote in the note.

Aside from the regulatory headwinds both companies could face, Uber also may have limited share valuation upside.

"The company's fundamentals exhibit a 'double negative' — revenue growth deceleration and growing losses — and 2019 operating margins are worse than in 2018," Kulkarni wrote.

Price Action

Uber shares were up 1.7% on Thursday at $29.50, while Lyft was trading at $39.42, up 2.6%.