Wall Street bullish on Lyft, Uber on lower driver costs, recovery signs

(Reuters) – Wall Street gave a resounding vote of confidence to ride-hailing stocks ahead of Uber’s (UBER.N) results on Thursday, after Lyft indicated a recovery in demand and lower costs as rising unemployment creates more supply of drivers than jobs in the market.

Shares of Lyft surged nearly 22{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}, while Uber’s stock jumped about 9{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f}.

As parts of the U.S. economy start to re-open, demand for ride-hailing services is expected to get a boost, following weeks of upheaval in the core businesses of Lyft and Uber due to lockdowns caused by the COVID-19 outbreak.

Americans are also expected to turn to ride-hailing as a significant source of income, which in turn will create a supply glut that will help companies such as Lyft and Uber to curb driver incentives and other costs.

“The Street was bracing for worse on 1Q and overall cost cuts/road to profitability was some relative good news in a dark time,” Wedbush analysts said.

“The dichotomy we are seeing in this environment is that despite rides being significantly depressed (and likely to continue being so), Lyft is seeing stronger profitability.”

Total costs and expenses fell about 29{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} to $1.37 billion year-over-year for Lyft in the first quarter.

At least four brokerages, including Wedbush and RBC Capital Markets, raised their price targets on Lyft on Thursday.

Lyft and Uber have long resisted calls by some U.S. lawmakers to classify their drivers as employees, which would force them to pay benefits.

RECOVERY IN DEMAND

With lockdown rules easing in the Unites Sates, Lyft rides rose 21{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in the first week of May compared with a low point on April 12.

“We expect rideshare demand to gradually come back as States relax stay-at-home orders and as riders possibly prefer private rides vs. public transport in the near term,” J.P.Morgan analysts said.

Lyft witnessed strong double-digit ridership growth in cities such as Atlanta, Chicago, Houston, New Orleans, New York City and Seattle between the week ended April 5 and that ended May 3, prompting the company to issue an upbeat forecast.

Lyft’s commentary bodes well for larger rival Uber Technologies (UBER.N), which is slated to report its first-quarter numbers later on Thursday.

“We believe…greater-than-expected losses at one is likely to be read as a negative read-thru to the other, and better-than-expected profitability at one is likely to be a positive read-thru to the other,” RBC Capital Markets said.