Tough Road Ahead For Lyft And Uber

It’s been a tough couple of weeks for ride-hailing apps Lyft (NASDAQ: LYFT) and Uber (NYSE: UBER). After steadying the ship from a horrendous first half of the year that saw their core user demand evaporate overnight, a Californian court recently ordered both companies to classify their drivers in the state as employees.

This has long been a bone of contention and the difference to each company’s balance sheet is huge. If the ruling is enforced, then as employees all drivers must be paid a minimum wage and overtime, must receive paid rest periods, along with various reimbursements for driving with their personal vehicles. Not to mention it opens the pandora box of offering their drivers paid health insurance. If their appeal is successful and the drivers remain as independent contractors, then this added expenditure is avoided.

Leaving California

Uber went so far as to say that if their appeal fails and the ruling is enforced, they’ll cease to operate in California. Lyft wasn't long issuing a similar statement yesterday. Wall Street has been left to crunch the numbers and hypothesize on which outcome would be worse; each company pulls out of one of its most important markets or else assumes the extra cost of operating there. And what happens if other states start making similar rulings?

If the appeal on the recent court ruling fails, Uber and Lyft have one card left to play, Proposition 22. This is a ballot measure, funded by themselves and Doordash, that would override the state statute and allow the status quo to remain. They’re looking for Californian voters to vote yes on that in early November.

So with each company’s future somewhat dependent on the whims of Californian voters, neither could be said to be in a strong position right now. On top of all that, their recent earnings reports make for grim reading. 

Dismal Numbers

Lyft was out with their Q2 earnings after Wednesday’s bell with EPS deep in the red and revenue contracting 60% year on year. Uber’s Q2 report last week wasn’t too different with revenue falling 30% year on year. Uber’s shares have been performing better out of the two and are effectively at pre-COVID levels, if not at pre-COVID heights. Lyft’s shares on the other hand look heavy, are still down 40% from pre-COVID levels and still at March levels, albeit well off the lows.

While their core businesses appear similar and they’re direct competitors for the ride hailing app industry, Uber has a growing revenue stream that Lyft is in dire need of. Their food ordering and delivery app, Uber Eats, has been a roaring success and if anything, acted as a strong hedge for the company against the coronavirus. While people might not have been grabbing Uber’s to and from the office every day, they certainly weren’t going out to eat and party at night time either. Instead, they were at home helping to drive up digital streaming numbers and ordering take-out.

The company’s revenue from rides, termed their ‘Mobility Segment’, declined 73% year on year while revenue from Uber Eats, their ‘Delivery Segment’ more than doubled. This helps to explain the discrepancy in share performance in recent weeks. In the early days of the pandemic, Lyft tried to pivot towards a similar business with their ‘Essential Deliveries’ idea but this hasn’t gained much traction and feels like too little, too late.

For all that though, people still need to get around, pandemic or no pandemic and nobody is suggesting that the archaic taxicab industry is about to make a resurgence. So while the outlook is uncertain at best right now, their core industries remain and investors and Wall Street alike will need to digest the various developments as they come.