Lyft (NASDAQ:LYFT) stock continues its slide. Its short-term fortunes have worsened as new laws in California will now force the company to treat drivers as employees rather than contract workers.
This bill may actually make little difference to Lyft’s future. Longer term, LYFT could still become not only profitable but also a stock market darling.
However, this causes significant uncertainty nearer term. Without widespread adoption of more advanced technology, I see few reasons for an optimistic outlook on Lyft stock.
Recent Legislation has Hurt Lyft Stock
Since July, the LYFT stock price, now at about $41 per share, again finds itself in a downtrend. The ridesharing service has become the victim of increased regulation in key markets. In early August, New York City voted to continue its cap on the number of permitted drivers for both Lyft and archrival Uber Technologies (NYSE:UBER).
Also, in the state of California, Governor Gavin Newsom signed the so-called “gig worker” bill. This law requires Lyft and Uber to treat drivers as employees.
As most know, Lyft treated its drivers as independent contractors who set their own hours. Now, with this new law, how Lyft and Uber will operate in the state remains unknown. Plus, this increases profitability pressure on both companies as they continue burning cash.
The Truth about the Business Model
Still, I think the rarely mentioned truth about Lyft is that it will likely never profit under its current model. That’s the case with or without a gig worker bill. Most investors who buy Lyft stock purchase it for its future.
As I have said in previous articles, Lyft and Uber have taken an approach that resembled Netflix (NASDAQ:NFLX) in its early days. In other words, it continues to build its name and its business on current technology. However, as technology evolves, it will ultimately change its business model and hopefully turn a profit.
The new technology in Lyft’s case is self-driving cars. Such a change will dramatically reduce the company’s single largest expense, drivers. Hopefully, this will turn the firm into a profitable company.
This is why I do not see Chris Markoch’s point on the industry’s low barriers to entry as a valid concern. If it were a profitable industry, I would agree. However, the losses hurting the LYFT stock price will probably discourage most prospective new entrants. Moreover, building a national or even worldwide fleet of self-driving cars will take an entity such as Lyft or Uber.
What Happens to LYFT in the Meantime?
The question for Lyft is, can it hold out long enough to adopt such a model? The state of California just made that job a lot harder by burdening the company with more cost. Also, as Josh Enomoto stated, both consumer price sensitivity and a possible recession present further dangers.
More importantly for investors, what will happen to Lyft stock while everyone waits for the transition to take place? I see LYFT as dead money in the near term. As losses mount and fears about the economy continue, investors will probably continue to sell the stock.
However, if self-driving cars (and Lyft’s use of them) become more prevalent, I think the investment thesis improves dramatically. This would not only take LYFT to a profit, but I also think it would begin to see more elevated multiples.
The near-term outlook for Lyft stock continues to worsen as losses mount and increasing regulation in key markets places further pressure on the current business model. The company has already suffered massive losses and may also have to deal with a possible recession. Moreover, California’s recent legislation regarding gig workers calls into question how the company will operate under current conditions.
This bill also creates a greater need for Lyft to make the transition to self-driving cars. If the company can reduce its driver expense, it stands a better chance of turning a profit and boosting Lyft stock to higher levels.
Yes, California’s recent regulation adds to Lyft’s problem. However, with or without the bill, Lyft stock will continue to fall unless and until it can carry passengers from point to point without a human driver.
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.