ROAD RULES
Courtesy of Grant's Almost Daily
Let’s review the latest on the regulatory quandary in which ride-share giants Uber Technologies, Inc. and Lyft, Inc. find themselves.
On Aug. 10, a California judge granted a preliminary injunction ordering the pair to immediately begin adhering to Assembly Bill 5. The state law, which went into effect on Jan. 1, reclassifies drivers as employees rather than independent contractors, meaning ride share companies can no longer avoid paying healthcare and other common benefits such as Social Security taxes and Medicare withholding. The California market represents nearly 16% of Lyft’s total trip volume and roughly 7% for Uber, analysts at Bloomberg Intelligence estimate. Then, too, wider implementation of that law stands as a further risk. For instance, the Evening Standard noted last week that the U.K Supreme Court is currently debating similar protections.
Last Thursday, a California appeals court granted Uber and Lyft a 30 day stay to the Aug. 10 order, just before the pair were set to cease their operations in the Golden State. That followed a New York Times report earlier in the week suggesting that Uber was considering the idea of licensing its brand to independently operated franchisees in localities which insist on employee status for drivers.
In an interview on the Pivot School podcast, Uber CEO Dara Khosrowshahi emphasized the logistical difficulties which his company will face in complying with the measure:
We can’t go out and hire 50,000 people overnight. Everything that we have built is based on this platform that … brings people who want transportation or delivery together. You can’t flip that overnight.
Indeed. Instead of spending the past year or so putting systems in place to adhere to the law, the ride-share and third-party delivery industries have ponied up more than $100 million in support of legislation called Proposition 22, which would allow certain companies to be exempt from AB5 and will be voted on in November. Early returns on that investment appear promising, as an Aug. 9 poll conducted by Redfield & Wilton Strategies found that 41% of respondents plan to vote “yes” on Prop. 22, with 26% opposed and 34% undecided.
Even victory in the courts could be a fleeting success, as it would allow the fundamental limitations of the ride-share business to return to the fore.
On Aug. 6, Uber reported that second quarter sales slipped 29% from a year ago to $2.24 billion, despite a 103% jump in revenue at its Uber Eats unit (the company coughed up $2.65 billion to acquire peer Postmates, Inc. in July). Of course, while strong top-line growth has figured prominently in Uber’s rise to Unicorn and ultimately public company status, the pandemic-related business slowdown has helped the company narrow what had been ballooning losses, including Ebitda of negative $7.3 billion last year, compared to a $2 billion adjusted Ebitda loss in 2018.
For the second quarter, Uber posted an adjusted Ebitda loss of $837 million, compared to $656 million in “adjusted adjusted” red ink a year ago. Since coming public in May of last year, Uber shares have sunk by 31%. Lyft stock is down a cool 64% from its own spring 2019 IPO.
Hemorrhaging cash could be the pair’s biggest problem. Analysts at Bloomberg Intelligence estimated Friday that Uber and Lyft will see $3.5 billion and $1 billion in cash burn, respectively, for full-year 2020, figures which exclude the potential effects of higher labor costs or a California shutdown related to the AB5 legislation. Bloomberg Intelligence’s Mandeep Singh and Matthew Martino further note that “even after laying off more than 20% of their workforce[s], the companies may have to continue cutting fixed costs.”
For more on Uber, including transportation expert Hubert Horan’s forceful argument detailing why the company may never see sustained profitability, see the Nov. 1, 2019 edition of Grant’s.
RECAP AUG. 25
Stocks saw a modest late rally following a near daylong sideways drift to leave the S&P 500 with modest gains and another closing high, while Treasurys came under pressure with the 10- and 30-year yields rising to 1.18% and 1.4%, respectively. Gold edged lower to $1,934 an ounce, WTI crude rose above $43 a barrel, and the VIX finished at 22.
– Philip Grant
Image by lorikoenig715 from Pixabay
