Rebounding from its 52-week low of around $14 per share, Uber (NYSE:UBER) stock has already been a winner for those brave enough to buy as markets were their most fearful. But the ship may have already sailed in terms of shares moving higher. Markets may be more confident, yet the rideshare giant’s underlying issues remain big risks.
Even when the economy was booming, Uber was burning cash. But now, with the novel coronavirus and its associated shutdowns? Much of the country remains on lockdown. There are no restaurants to go to. No concerts or sporting events to attend. The lion’s share of airline flights have been canceled. People are working from home, reducing the app’s commuting volume.
Simply put, Uber is suffering big time from social distancing. This pandemic also accelerates the company’s existing labor issues. Put these two together, and it’s tough to say shares are a “screaming buy.”
There are other factors at play. Consider the company’s mostly variable cost structure. In contrast, other service industries are hurting big time due to their high fixed costs. Social distancing could also be a tailwind for the company’s Uber Eats unit.
With this mixed bag of catalysts and risks, what’s the play with Uber stock?
Coronavirus and Uber Stock: Good News, Bad News
Will coronavirus wreck as much damage to the rideshare space as it has to restaurants, airlines, and casinos? That remains to be seen. Granted, it’s tough to say its the best of times for Uber. According to the company, rides are down significantly since the pandemic hit North America.
With big revenue declines, one would think that’d be the death knell. Especially when considering Uber has burned through cash since its founding. But, as InvestorPlace’s Will Ashworth recently discussed, things may not be so bad.
Firstly, two-thirds of Uber’s costs are variable. With their business model, much of the fixed costs fall onto its drivers. This could mean the company can better manage additional cash burn caused by the pandemic.
Secondly, while ride shares are floundering, Uber Eats is seeing a big boost in business. That’s no surprise, given most restaurants are closed. Yet the 26% boost in Uber Eats sales doesn’t fully counter the big declines in ride-share use.
There’s more to the story than the respective headwinds and tailwinds from the pandemic. The company’s dependence on the “gig economy” may be the biggest risk factor. Not just in the near-term, but over the long haul.
Labor Issues Remain Uber’s Biggest Risk
It’s no secret the ride share industry faces big backlash about their labor policies. In my March 17 article on Lyft (NASDAQ:LYFT) stock, I discussed how this backlash means bad news. Either governments are going to intervene, or bad PR from the labor skirmish is going to compel the industry to improve driver compensation.
The coronavirus adds another wildcard to the conflict. As InvestorPlace’s Dana Blankenhorn wrote April 6, Uber is trying to have its cake and eat it too, so to speak. The $2 trillion CARES stimulus bill provides unemployment benefits for drivers. But since Uber classifies its drivers as independent contractors, the company doesn’t pay unemployment taxes.
Simply put, expect the backlash over ride-share labor policies to increase. Especially if we see a new U.S. President in the White House after November’s election. President Donald Trump has indicated he would veto a bill making its way through congress that could potentially change the status of Uber’s drivers. But if the Democratic Party regains the White House and Senate, legislation like this could become law.
Yet, Uber could have an out if regulations impact their use of the gig economy. Self-driving cars not only circumvent this. They could also be Uber’s pathway to profitability. But pivoting towards autonomous vehicles would turn their asset-light model to one that’s much more capital intensive. In short, the company could be trading one set of problems for another.
Bottom Line: Skip Out, Even As Shares Rebound
Uber stock may have nearly doubled in recent weeks, but don’t consider shares a buy. The company’s main issues remain at play. The pandemic only heightens the issues surrounding their dependency on gig economy workers. Expect more federal, state, and local level scrutiny going forward.
At some point they need to post profits. Otherwise, the company can’t sustain its high market cap ($46.5 billion). Bottom line: skip out on Uber stock, and consider other opportunities as markets try to rebound.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
