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California AB-5 Vote Is Bad News for Uber and Lyft Stock

Wayne Duggan

Uber (NYSE:UBER) stock and Lyft (NASDAQ:LYFT) stock are off to bumpy starts to life on the market. A critical vote in California could soon make life much more difficult for the ridesharing stocks, particularly Lyft.

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The biggest criticism of Lyft stock has been that the company hasn’t proven a path to profitability. If Lyft has to start providing its drivers with costly benefits, that path to profitability will get much longer and narrower.

What Is Assembly Bill 5?

Throughout their existence, Uber and Lyft have classified their drivers as independent contractors rather than employees. By doing so, those drivers are not entitled to benefits or other perks associated with full-time employment. That classification allows companies like Lyft to save a bundle on costs, which is good news for Lyft stock price.

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In 2019, the California state Supreme Court made a ruling known as the Dynamex decision. The Dynamex decision dictates a three-pronged ABC test for determining whether or not a worker is an independent contractor:

The employee must be free to operate free from control of its employer. The employee must fall outside of the typical scope of the company’s hiring. The worker must have an independent business outside of the job he or she was hired to do.

This ABC test is included in AB-5, a new bill that is currently passing through the legislative process in California. Lawmakers in both state houses have until Sept. 13 to vote on the bill.

Uber and Lyft Aren’t Happy

Investors don’t need to dig too deeply to see what impact AB-5 may have on Uber and LYFT stock. Uber and Lyft reportedly paid drivers up to $100 to protest the bill outside the state capitol.

The companies also published an op-ed in the San Francisco Chronicle making the case against AB-5.  Some Uber and Lyft drivers have said the companies even misled them into signing petitions in protest of AB-5. The drivers received in-app messages asking them to sign a petition to help their companies “fight for driver flexibility and independence.” The messages did not mention AB-5 by name.

The fact that Uber and Lyft are fighting AB-5 so hard is a clear sign the law would be bad news for business. California has also historically been a leader in progressive movements that ultimately sweep nationwide. In other words, the damage for UBER and LYFT stock may not be contained in California.

Biggest Risk for Lyft Stock Price

Wedbush analyst Daniel Ives says AB-5 could put Uber and Lyft on the hook for a wide range of new costs. These costs include vehicle maintenance, gas, and insurance. In addition, workers would be protected under U.S. labor laws. The companies would be responsible for payroll taxes, social security, unemployment insurance taxes and state employment taxes.

AB-5 would be bad news for both companies, but its a bigger risk to Lyft. Wedbush estimates California represents about 17% of Uber’s total business. For Lyft, California is 24% of all U.S. sales.

Ives says if AB-5 passes, Uber and Lyft are likely to challenge it in court. That process could be long and expensive as well, and it wouldn’t guarantee a victory.

Investors and analysts have been digging into Uber and Lyft’s cash flow, growth rates, and revenue per active rider. Ives says they should also be paying close attention to AB-5.

“This senate decision is a microcosm of possibly the largest risk in the ride-sharing industry and a situation we will be closely watching over the coming months,” he says.

I have been very critical of the two ridesharing IPOs all year, particularly Lyft stock. AB-5 is just one of a handful of reasons investors should stay on the sidelines at this point.

Even if you are a Lyft stock bull, your thesis likely revolves around what the company will grow to become five or 10 years down the line. It’s unlikely the picture for Lyft will change dramatically in the next nine-to-12 months. By waiting a little while before buying, investors can get some much-needed clarity on AB-5 and on Lyft’s financial trajectory going forward.

As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.

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