Over the last five to ten years, the “gig economy” has catalyzed significant structural changes in the way key consumer services are provided and demanded. It’s no secret that companies like Uber and Lyft that rely on a network of independent contractors to provide services to customers have attracted a lot of attention in the public and private markets. Unfortunately, they have also attracted the attention of lawmakers and regulators who have embroiled these gig economy firms in high profile lawsuits over the status of their workers. As stands, all the major gig economy firms classify their workers as independent contractors. This classification allows workers a large amount of flexibility, but it also allows companies like Uber and Lyft to avoid providing drivers with benefits like healthcare, paid vacation, and a minimum wage. This tradeoff allows Uber and Lyft to keep their costs low as they continue to work towards generating operating profit. This is crucial, because as the chart below illustrates, the market does not believe it has been going well so far:
Broadly speaking, both Uber and Lyft shares have performed very poorly since their IPOs, especially when compared to the big-tech heavy Invesco Nasdaq 100 Index (QQQ), which has seen significant growth since early 2019. This poor share price performance is reflective of the fact that neither Uber nor Lyft are making any money as stands. In fact, SEC filings show that Uber reported a net operating loss of $5.2B in its last quarterly report, and Lyft similarly reported a net operating loss of approximately $437M.
Both companies have reported similarly staggering losses each quarter since going public, a fact that has made investors increasingly vary of sinking money into shares. Fundamentally, both Uber and Lyft are subsidizing the cost of rides for riders and the amount earned by drivers in their quest to gain market share and grow their user base. This is causing both companies to operate at a loss under the assumption that they will eventually be able to convert market power into profitable operations.
Enter California lawmakers. Earlier this year regulators in the Golden State filed a lawsuit against Uber and Lyft, claiming that drivers are misclassified as independent contractors and should in fact be classified as employees, a change which would entitle them to the benefits listed above. This lawsuit is bad news for companies in the gig economy. Being forced to classify workers as employees would increase the organizations' costs and push a quarterly profit further out of reach. Against this backdrop, gig economy firms breathed a collective sigh of relief on November 3rd when California voters passed Proposition 22 - an Uber, Lyft, and Doordash sponsored measure that allows the firms to bypass a California state law and continue to classify their drivers as independent contractors. In order to get the piece of legislation approved, the ride-hailing organizations did make certain concessions to their drivers, such as a minimum per-mile wage, which will increase their costs. However, the projected increases are modest compared the impact of a wholesale driver reclassification.
Unfortunately for Uber, Lyft, Doordash, and other tech firms that rely on networks of non-employed workers, it is unlikely that the passing of Prop 22 marks the end of the batter over worker classification. For investors, this legal battle is an enormous risk to investing in loss-generating gig economy firms and it is highly likely that the ongoing nature of litigation in this space is going to impact equity values. However, as the gig economy continues to mature and if Uber and Lyft can make progress towards generating an operating profit, the relative impact of a worker reclassification may decline. This would precipitate more favorable conditions under which to take a position in the two ride-hailing giants. Until that day comes, however, a taxi might be a better bet.