Virus Fears Threaten Uber’s Business Model

Advertisement

Uber (NYSE:UBER) earned a $75 billion market capitalization on the strength of its business model. When it debuted to public investors, Uber stock was a hot name to watch.

Coronavirus Threatens Uber Stock

Source: vaalaa / Shutterstock.com

The model called for its drivers to be independent contractors, not employees.

The novel coronavirus shows that business model was a Potemkin village, a Hollywood set, a hollow shell.

As the virus begins to kill drivers while leaving others out of work, both the company and government are under pressure to fund benefits.

CEO Dara Khosrowshahi wants the government to help his drivers, but doesn’t want to fund the resulting “safety net” of benefits himself. He wants a “third way” that will let workers get some benefits but won’t leave Uber on the hook. What does this mean for Uber stock?

You Want to Play, You’ve Got to Pay

For now, Uber has agreed to give drivers 14 days of financial assistance if they’re diagnosed with Covid-19 and go into quarantine. But Uber isn’t putting the company’s cash pile, about $11.3 billion at the end of 2019, behind workers.

Uber isn’t telling New York drivers they may be entitled to unemployment benefits. It’s still fighting the 2018 decision that classified them as eligible for benefits.

Uber says its drivers aren’t eligible for sick leave. The payroll tax and sick leave provisions of the recent coronavirus “stimulus” don’t apply to them. Neither will the business protections, until after April 10.

But the workers were specifically protected under the law as passed by Congress. If the workers get benefits under the law, why won’t Uber call them workers?

The reason is simple. Uber can’t afford to. The whole business model of Uber, Lyft (NASDAQ:LYFT) and all companies that employ freelancers is that they’re separate from the people doing the work. The costs of health insurance and other benefits employees take for granted have been offloaded. In normal times they’re offloaded to workers. When a disaster like the coronavirus hits, they’re offloaded to the government. Yet even after the crisis is over, Uber won’t be paying back the government for these benefits.

Politically, it means other businesses which do pay benefits to workers will be subsidizing Uber through their taxes.

Are Things Back to Normal for Uber Stock?

There are analysts telling you to buy Uber stock today.

They insist its cash position will protect it, and that damage from the virus is temporary. The company calls two-thirds of its costs “variable,” meaning if there are no rides there are no costs.

Khosrowshahi is telling investors Uber can suffer 80% fewer rides, for the rest of 2020, and still have $4 billion in cash. He says the Uber Eats delivery business is continuing to grow. Uber Eats is presently third in the food delivery market, behind privately held DoorDash and Grubhub (NYSE:GRUB).

Other costs are also variable. Uber is halting the buildout of a second headquarters in Chicago. The building, a former post office, was meant to hold its freight service.

Another variable may be legal costs related to self-driving cars. Former Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) engineer Anthony Levandowski is now saying Uber should pay his costs. He says Uber knew he was stealing intellectual property when it hired him.

The Bottom Line

The coronavirus is the first news event to hit the whole world at once.

In previous wars and pandemics there were markets where people could hide, at least for a time. World War II wasn’t fought in South America.

This is different. The coronavirus ends an era and starts a new one.

I don’t think the last era’s business models, meant to insulate companies from corporate responsibility, are going to play in this new era. I wouldn’t touch Uber stock with a barge pole.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story. 

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Tweet him at @danablankenhorn, connect with him on Mastodon or subscribe to his Substack.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/coronavirus-threatens-uber-stock-gig-business-model/.

©2024 InvestorPlace Media, LLC