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Deutsche Bank initiates Lyft at 'buy'

Deutsche Bank initiated coverage of ride-hailing company Lyft Inc. at "buy" with a price target of $70, according to a Sept. 5 research note.

Lyft's stock could be bottoming despite better-than-expected second-quarter earnings, research analyst Lloyd Walmsley wrote in the note.

The stock, which closed trading Sept. 5 at $46.40, was weakened by an early release from Lyft's IPO lockup, regulatory uncertainty around proposed California legislation that could require companies to reclassify independent contractors as employees and concerns about whether ride-hailing is a good business, Walmsley said.

"We think the bulk of the lockup pain is in the shares at this point and should not be an incremental drag on the shares," the analyst wrote, referring to the early expiration of Lyft's lockup period. Under a typical lockup period, insiders including founders and employees cannot sell their shares for a specified time.

"We think fears around the California [Assembly Ballot] 5 impact are overblown; in a worst-case scenario, we see Lyft raising prices and passing along the cost to riders and creating a slight drag on growth in CA," Walmsley said.

The analyst added that there are barriers to scaling ridesharing companies like Lyft, and since the market is dominated by Lyft and its rival Uber Technologies Inc., "improving efficiency should drive healthy long-term margins."

Deutsche Bank looks positively at Uber's shares too, but sees "the story there as slightly different."

"We like Lyft as a pure-play on ridesharing in the U.S., where the market is quickly becoming more rational," Walmsley said, adding that Uber is focusing on a global strategy with other offerings including Uber Eats and its freight business.

The recent sell-off in Lyft's shares is an "attractive entry point," Walmsley said, especially for longer-term investors who do not mind some volatility.

The analyst said Lyft shows the promise of a clear path to improved profitability through lower subsidies, higher prices, lower insurance costs and other cost savings.