Lyft (NASDAQ:LYFT) continues to find itself under attack in courts on both coasts. On July 16 a federal appeals court ruled that New York City can ban ads inside rideshare vehicles, which fortunately didn’t hurt for Lyft stock. That won’t last forever, though.
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On the opposite side of the country, California lawmakers have tried to push through a bill that makes it harder for Lyft and its archrival Uber (NYSE:UBER) to classify workers as independent contractors.
So far, the stock has not reacted to the news. The LYFT stock price has now risen above $65 per share. This matches high rarely seen since soon after its IPO. However, such rules may end up benefitting Uber at the expense of both Lyft stockholders and the people the regulations are supposed to help.
New Rules and Lyft’s Business Model
These regulations come at a time when Lyft’s financials have become strained. The price-to-sales (PS) ratio of around 7.5 stands well above S&P 500 averages. Forecasted revenue growth of 53.8% for this year looks attractive.
However, Wall Street projects significant losses for years to come. One consensus estimate forecasts losses of $11.87 per share for 2019. By 2022, analysts still predict a loss of $2.88 per share.
Our own Wayne Duggan correctly states that California’s AB-5 Bill would make the situation worse. Lyft sustains massive losses as things stand today. At least in New York City, additional revenue will likely not come from ads in cars. Having to pay benefits on top of that further endangers the company.
Lyft Needs Driverless Cars
However, the dirty secret about such regulations is that they often end up hurting those they intend to help. In American business, we already see where rising labor costs have sped the pace of automation. As pressure to raise wages hit McDonald’s (NYSE:MCD), the company turned to order kiosks to reduce labor needs.
Both Lyft and its archrival Uber plan to use the same approach. As I stated in a previous article, Lyft’s future depends on fewer workers regardless of any laws or rules. As the company gains approvals, they will begin to operate more driverless cars.
Customers can already find such vehicles in Phoenix, albeit with a safety driver behind the wheel. In the long run, this will reduce costs as the company will need fewer drivers, or perhaps none at all. Moreover, these self-driving systems will probably not demand health insurance or paid time off.
Compliance Costs Benefit Uber’s
Furthermore, stringent regulations often lead to high compliance costs. The smaller the firm, the harder compliance becomes. Investors have a slight worry here as Lyft’s $18.9 billion market cap is just over one-fourth the size of Uber’s $73.8 billion.
Despite the differential, Lyft remains a large enough company to comply with complex rules. I doubt that would spell the end of LYFT. However, Uber’s larger size and more diversified business lines ease the burden of compliance compared with Lyft. Such a differential could draw more traders toward Uber stock and away from Lyft stock.
Final Thoughts on LYFT Stock
Unfavorable laws and court rulings could hurt LYFT stock compared to that of its primary rival. Lyft’s business model faces strain anyway as profitability will likely not happen for years. Less ad revenue and higher employment costs place further pressure on the company.
However, the larger the firm, the less these rules tend to affect a company. Unfortunately for those who chose LYFT stock over Uber, that cost will probably hit Uber less hard. Such regulation may not end Lyft, but it may take away advantages that could benefit holders of LYFT Inc. stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
