Lyft Inc. shares held well below its initial public offering price Tuesday, after an analyst made a bearish call on the stock and cast doubt on the idea that ride-hailing could replace car ownership with young consumers.
Michael Ward of Seaport Global Securities initiated coverage of Lyft LYFT, -1.08% with a sell rating, writing that Lyft’s current valuation bakes in “overly optimistic” assumptions about the transformational nature of ride hailing. He set a $42 price target on the shares, which is 42% below the initial public offering price of $72.
“In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service,” Ward wrote in a research note. “Despite the optics of vehicles being an underutilized asset, we believe people will continue to own their own vehicles as primary transportation and instead rely on the ridesharing services as a convenient supplement.”
Shares are rose 0.5% in morning trading, but was still 3.7% below its IPO price.
Lyft’s stock appeared to have a promising debut on Friday when it opened 22% above its IPO, but the stock pared back those gains by the end of the first trading session and closed up only 8.7%. Shares tumbled on Monday, falling nearly 12% to end the day 4.2% below the IPO price.
Don’t miss: Lyft stock initiated with neutral rating at Guggenheim
Ward sees room for Lyft to continue growing its ridership, but he expects that the competitive industry landscape will make it difficult for the company to improve its revenue-per-ride metric. He’s also concerned about Lyft’s steep accrued insurance reserves, which represented about 30% of the company’s revenue last year.
“The nature of the ridesharing business model, in our opinion, has an inherent risk in the skill level of drivers and therefore insurance reserves are likely to remain a significant part of overall cost,” he wrote.
See also: Here are the big-name startups preparing for 2019 IPOs
FactSet doesn’t list Ward’s rating on Lyft shares but says that of four other analysts covering the stock, one has a buy rating and three more have hold ratings.
Lyft has gone public at a time the Rennaisance IPO exchange-traded fund IPO, +0.03% has rallied 33.3% year to date, while the S&P 500 index SPX, -0.01% has gained 14.3%.
