Uber Technologies' (UBER 1.90%) stock price plunged 10% on Oct. 11 after the U.S. Labor Department unveiled a new proposal that will force employers to reclassify some independent contractors -- including janitors, construction workers, delivery workers, and ride-share drivers -- as full-time employees. Labor Secretary Marty Walsh said that misclassification "deprives workers of their federal labor protections, including their right to be paid their full, legally earned wages."
Uber, Lyft, DoorDash, and other gig economy companies had previously faced a similar assembly bill (AB5) in California, which they collectively countered with a ballot initiative called Proposition 22. Prop 22 was approved by the state's voters in late 2020 but subsequently ruled unconstitutional and unenforceable by a court in August 2021. Uber and its industry peers are appealing that ruling.
Image source: Getty Images.
The new Labor Department proposal represents an escalation of that state conflict on a federal level and would reverse a Trump administration ruling, which actually made it easier for companies to reclassify their workers as independent contractors. This certainly sounds like a major headache for Uber, which could see its margins crumble if it reclassified all its drivers as employees. But is the market overreacting to the news? Let's review the bear and bull cases to decide.
What the bears will say about Uber
The bears will point out that even though Uber classifies its millions of drivers as independent contractors, it hasn't ever been profitable on a GAAP (generally accepted accounting principles) basis.
|
Period |
Q2 2022 |
Q1 2022 |
FY 2021 |
FY 2020 |
|---|---|---|---|---|
|
Revenue |
$8.07 billion |
$6.85 billion |
$17.46 billion |
$11.14 billion |
|
Net Income |
($2.60 billion) |
($5.93 billion) |
($496 million) |
($6.77 billion) |
Data source: Uber.
Analysts expect Uber's revenue to rise 79% to $31.32 billion this year, but for its net loss to widen to $8.85 billion -- partly due to its investment-related losses in companies like Grab, DiDi Global, Zomato, and Aurora -- followed by a narrower loss of $321 million in 2023. But if Uber still can't break even while mainly relying on lower-cost independent contractors, what happens if it's forced to reclassify those drivers as employees?
In its latest 10-K filing, Uber says its business "would be adversely affected" if its drivers "were classified as employees, workers or quasi-employees instead of independent contractors." It also said that classification was "being challenged in courts, by legislators, and by government agencies in the United States and abroad." It was already forced to grant its U.K. drivers paid vacations, rest breaks, and a minimum wage while using the app last year -- and that ruling could spark similar rulings in other countries.
NYSE: UBER
Key Data Points
What the bulls will say about Uber
The bulls will point out that Uber's number of monthly active platform consumers (MAPCs), total trips, and gross bookings have all been growing rapidly since it suffered a temporary slowdown during the pandemic:
|
Period |
Q2 2022 |
Q1 2022 |
FY 2021 |
FY 2020 |
|---|---|---|---|---|
|
MAPCs Growth |
21% |
17% |
27% |
(16%) |
|
Trips Growth |
24% |
18% |
27% |
(27%) |
|
Gross Bookings Growth |
33% |
35% |
56% |
(11%) |
Data source: Uber. Year-over-year growth.
They'll also tell you that Uber wisely divested many of its unprofitable divisions -- including several of its overseas units and the ATG (advanced technologies group) that had been developing driverless cars -- over the past few years to stabilize its margins. It gained its stakes in Grab, Didi, Zomato, Aurora, and other companies through those divestments.
If we exclude those investment-related losses and only focus on Uber's core business, we'll notice that its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) actually turned positive in the first half of 2022. Analysts expect it to generate a positive adjusted EBITDA of $1.55 billion for the full year and for that figure to more than double to $3.25 billion in 2023 as it further reins in its spending.
|
Period |
Q2 2022 |
Q1 2022 |
FY 2021 |
FY 2020 |
|---|---|---|---|---|
|
Adjusted EBITDA |
$364 million |
$168 million |
($774 million) |
($2.53 billion) |
Data source: Uber.
As for the Labor Department proposal, Uber said its own drivers "consistently and overwhelmingly" prefer the "unique flexibility" of being independent contractors. It also said it would hold "constructive dialogue" with the Labor Department to work through the issue. Uber's rival Lyft said there was "no immediate or direct impact" on its business and noted that the Obama administration had issued similar rules (many of which were overturned during the Trump administration), which didn't ultimately derail the growth of gig-economy apps.
Lastly, the bulls will note that Uber's enterprise value of $51.4 billion values it at just 1.4 times next year's sales and 16 times its adjusted EBITDA. Those low valuations suggest the regulatory threats have already been baked into its stock price.
Which thesis makes more sense?
I believe the fears about the Labor Department proposal are overblown and that Uber, Lyft, and their peers will likely band together again to reach a Prop 22-like compromise with the government if it's actually passed into law. I also think Uber's stock is undervalued right now. That said, I wouldn't invest in Uber in this bear market, which punishes imperfect growth stocks. Instead, I'd prefer to stick with more reliable growth plays until Uber's regulatory headwinds dissipate.
