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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 set a $60 price target. Lyft closed around $49 on Friday. Shares of Lyft popped 4.3% on 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 analysts Jake Fuller and Ali Faghri wrote in a note to clients Monday.
Since Lyft went public in March, followed by its biggest competitor Uber, investors' biggest concern has been the companies' path to profitability. Fuller and Faghri had said it could be tough for Lyft to raise fare prices or cut driver wages in a competitive category, but he said the company's pricing model over the last two quarters has surprised him.
Guggenheim 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 and Faghri 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," Fuller and Faghri wrote.
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