Why Shares of Hertz Global Holdings and Avis Budget Group are Slumping

What happened

Shares of Hertz Global Holdings, Inc. (NYSE: HTZ), an automotive vehicle rental service, are down 12% as of 11:35 a.m. EDT Tuesday, after Morgan Stanley analyst Adam Jonas sees headwinds for the company. Shares of Avis Budget Group, Inc. (NASDAQ: CAR) are also being pulled down 9% thanks to the gloomy outlook.

So what

In the analyst note, Jonas mentions both companies will struggle facing secular and cyclical headwinds and won’t have the pricing power to offset increasing fleet depreciation costs. Jonas initiated coverage on Avis and slapped on a $30 price target, much lower than Monday’s $38 closing price. And while he bumped Hertz price target by $2 to $15, that was also significantly lower than Monday’s $19 closing price.

Image source: Getty Images.

Now what

It’s easy to bet against Hertz and Avis, and investors aren’t sure how the companies will fare as the transportation world moves toward not only driverless cars, but ride-hailing and ride-sharing services. Rental companies will have to adapt, and quickly. Those headwinds and challenges are why Avis previously acquired Zipcar to dip its toe in car sharing, and inked a deal with Waymo, Alphabet‘s driverless car unit, to provide fleet support and maintenance services in the Phoenix area.

In addition to the long-term challenges facing rental companies, investors also have to keep in mind how drastically used car prices can impact their business and stock price — used car prices have been strong recently, but that trend could reverse. If you’re willing to hold shares of Hertz and Avis, be prepared for volatile swings such as today.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Miller has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.

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