This month, California enacted a law that closes a lot of the loopholes that had allowed businesses to classify many of their key workers as contractors rather than as employees. Among the companies that will feel that change most keenly are Uber (UBER +8.64%) and Lyft (LYFT +1.21%). (It may just be one state, but with 40 million or so people and the world's fifth-largest economy, California looms large in their balance sheets.)
Given that, MarketFoolery host Chris Hill and senior analyst Jason Moser were a bit perplexed at the explanation given by a Wall Street analyst who on Monday upgraded both ridesharing companies' stocks: Regulatory risks, he said, are already priced into them, and he is upbeat about their abilities to improve and expand their offerings.
In this segment of the podcast, the pair discuss the value proposition of the ride-hailing services, the companies' pricing power, their ability to expand into adjacent services like food delivery, the gig economy, and more.
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This video was recorded on Sept. 16, 2019.
Chris Hill: On a day when the market in general is slightly in the red, shares of both Uber and Lyft are up 4% to 5%. This appears to be due entirely to an upgrade from HSBC. I'll just quote directly from the upgrade, HSBC writing, "We think regulatory concerns are priced in, while we continue to see a lot of optionality around product improvements for both Uber and Lyft." Do you agree with that?
Jason Moser: I don't think that regulatory concerns are necessarily priced in.
Hill: Sorry to cut you off, that was the first thing I thought! I was like, "Really?"
Moser: Maybe they know something that we don't? Regulatory concerns, one of the big ones out there is what California is doing with this gig economy bill. The economics of businesses like Uber and Lyft, the story for the longest time -- we've been looking at these businesses, thinking, "Well, they're able to keep leaner cost structures, because the drivers are contractors, not full-time employees." They're not spending as much in maintaining that employee base as a company like us here at The Motley Fool. We have as many employees as we have, and we're paying for healthcare, retirement, all this good stuff. Lyft and Uber and other businesses like that are able to maintain leaner cost structures because of that contractor status. How that exactly shakes out, to me, seems very nebulous at this point. It does sound like California's going to sign that bill in the law. And it does sound like Uber and Lyft and other companies are really fighting to have their businesses exempt from that law on a permanent basis. I have no insight as to whether they'll actually be able to pull that off. I can tell you, if they don't pull it off, the cost of running their businesses will become a lot more prohibitive. It'll be a lot more difficult for them to achieve profitability, which really then goes to the idea of, what do they do with the networks? Beyond just the economics of the business, it's the optionality. Now, I agree that the optionality is there. There's all sorts of neat things they can do with those businesses. They're in the middle of trying to do them, though. A lot is yet to be written. Man, it just seems to me to maybe be a little bit overconfident there. Maybe they know something I don't.
Hill: Part of this upgrade was talking about, in terms of what it means for shares of Uber and Lyft, they're talking about upside of 30% to 35%. What you were just saying reminded me a little bit of the conversation we had on Motley Fool Money last Friday, when we were talking about the We Company, and how they updated their S-1 filing, mainly around the corporate governance statutes. The point that you and Andy Cross and Ron Gross all made essentially was, "That's fine, but you still have the underlying business."
Moser: Business model still sucks.
Hill: I just looked at this and thought, yeah, they do have the optionality, but, to your point, some of that is in motion right now, and it'd be one thing if the underlying business was this money machine, but at the moment, it's really not.
Moser: No. I think that with companies like Uber and Lyft, the one thing that they've done early on, which I think is working in their favor -- and it's kind of what Amazon did for consumers early on. Essentially, it's not as much about low prices. It's more about good prices, and a convenient experience, in being able to order something and having it delivered to your doorstep in X number of days. The customer has been trained at this point to value convenience a little bit differently, perhaps, than we used to. We used to not really have a lot of options. We had to get in our car and go somewhere to go get something. Now, you have a lot of different ways that you can get your stuff. It makes us value our time differently. So, I think that what Lyft and Uber have done early on, it was less about this, "Wow, I can get a Lyft and an Uber and pay $10 less than I would pay for a cab." It's always really been about, how easy is it to do it? And you can do it anywhere, you just click a couple of buttons on your phone there, boom, a ride shows up.
It's all to say that, down the road, I think both of these companies have a lot of room to raise prices. Strategically, methodically, not all at once. But I think over time, they'll be able to raise prices because we've come to really love the value proposition that they offer. The simplicity, the convenience. It really is nice. Now, if we are able at some point to see self-driving cars take a bigger share on the road, these companies should be able to monetize that. Certainly, Uber is doing a very good job monetizing the Eats business, or at least growing that business. They reported last quarter gross bookings of $3.4 billion, just for the Eats business alone. That was up almost 100%. And they've got 315,000 restaurants on board with that platform now. As time goes on, I feel like we're moving more toward people ordering food as opposed to preparing it at home. So, I think that's something that they'll be able to really fire in on as well.
It's interesting to see how the market values these stocks. Lyft and Uber in that 4X sales range. The market is looking at both and thinking of all prospects. They're not giving the edge to one or the other, though. At this stage, you probably have to look at Uber and think the scale alone gives them a little bit more wiggle room there.
But yeah, the upgrade, 35% upside, that's not how we really do things here. We're not looking for that 35% upside, and then let's sell and go do something else. We're looking at these businesses and thinking, are these businesses we want to own for long periods of time? From that perspective, I could see owning Uber or Lyft, or a basket of the two, and thinking it's a five-year to 10-year play. But, I do like the trends. There's that.
