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California’s state Senate is set to vote on Assembly Bill 5 that, if passed, could be financially ruinous for Uber and Lyft, which stock is already experiencing hard times.
Stocks of Uber and Lyft fell to their new lows yesterday what seems to be their lowest point since their IPO. The thing is, each day the ride-hailing companies are experiencing huge skepticism from its investors.
Uber closed down 5.7% to $30.70, that is even less than its previous low of $32.57 that happened on Aug. 30. Earlier during the day, the shares smashed an intraday all-time low of $30.67. No better was Lyft as well. It was faced with a similarly abrupt fall, ending the day down 7.2% to $45.42, compared to its previous low of $48.15 on May 13. The stock dropped as low as $45.40 yesterday, touching a new intraday low.
Both companies have had a pretty steep ride on the public markets since their IPOs that both took place earlier this year, as investors continue to probe whether Uber or Lyft has the ability to achieve profitability in the future. Both companies were trading on Tuesday more than 30% below their IPO prices of $45 and $72 a share, separately.
In its second quarter of 2019, Uber reported a net loss of $5.24 billion, holding liable stock-based compensation costs. Lyft, on the other hand, lost $644.2 million in the second quarter, that was actually a outstanding rise compared to the $178.9 million it lost a year earlier.
Another reason for such bad performances can lay in the fact that investors comprehended the insinuations of a proposed California law that could alter their business models by making them change the ways they treat drivers. A vote on Assembly Bill 5, the California law that could change the driver’s employment status from independent contractors to employees, is expected today. Lawyers think that this kind of change should provide drivers with a so needed protections, such as a guaranteed minimum wage and the right to paid leave.
Currently, there is no minimum dollar amount drivers are guaranteed to earn, nor a minimum percentage of the total cost of a ride they can expect to take with them.
Analysts at Barclays estimated, that in California alone, reclassifying drivers as employees could cost Uber and Lyft $3,625 per driver each year. All the associated costs, including Medicare, FICA, and other payroll items, could total $290 million.
“We think an adverse ruling on the contract workforce issue would potentially bankrupt both Uber and Lyft.”
Tom White, tech analyst at DA Davidson Research says:
“We are getting closer and closer to it being codified into law. This will certainly be an issue for Uber and Lyft, particularly if other states follow their lead.”
Lyft and Uber’s management have tried to relieve investors’ worries regarding their businesses by drawing a path to profitability.
Lyft CFO Brian Roberts said he believed peak losses for the company were last year, while Uber CEO Dara Khosrowshahi described the second-quarter loss as a “once-in-a-lifetime” hit.
Those attempts shook some Wall Street analysts who said the price war between the ride-hailing businesses has come to an end, claiming Uber and Lyft could make a profit in the near future. Last week, Ronald Josey, an internet analyst at JMP Securities, said data from a recent survey found many riders don’t compare prices between the two services, “highlighting the inelasticity of demand.”
He held a Market Outperform rating on both Uber and Lyft saying:
“With fewer users price comparing between services as ride sharing services compete on brand and product, we believe pricing could continue to be rational.”