Uber Technologies stock is rising after Citigroup upgraded the ride-hailing company to Buy from Neutral, arguing that investor sentiment on the gig-economy firm will become more positive after it reports third-quarter results in November. Uber stock (ticker: UBER) is up 1.6% in Monday trading, but it has lost about a quarter of its value from the May initial-public-offering price of $45. The S&P 500 has risen about 1% over the same period. Citigroup’s Itay Michaeli wrote in a note to clients that he made the upgrade for three key reasons. The first is that he believes that sentiment on the beaten-down shares will improve. California’s new law going into effect on Jan. 1 mandates that companies such as Uber and Lyft (LYFT) treat contract workers as employees to the end of the IPO lock-up period in November, one of a few potential negatives hanging over the company. But Michaeli thinks that “[third-quarter] results could swing sentiment favorably.” He wrote that “at [Citigroup’s September] Tech conference, we felt that management conveyed a positive tone, and we also sensed some potential conservatism on [second-half adjusted earnings before interest, taxes, depreciation, and amortization].” Second, he argues that a sum-of-the-parts valuation of the company is bullish for the shares. It’s ride-hailing business alone, he estimates, is worth just over $30 a share. With Uber stock currently in that range, that means investors are effectively giving the company no credit for its Uber Eats food-delivery business. And lastly, he thinks that investors have to a certain degree lost sight of the long-term proposition of Uber: driverless cars. “The terminal value of the Rides business was always predicated on a different business construct than today’s,” he points out, and “if anything, we think Uber’s relative autonomous-vehicles position has improved this year.” An investment in Uber is fundamentally about a very different transportation system with very different economics than what current exists today, and Michaeli thinks investors will begin to understand that.


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