Ride-hailing giant Uber (NYSE:UBER) has enjoyed staggering growth since its founding several years ago. However, with mounting competitive pressures, regulatory troubles, and rising costs, the future looks rather uncertain. UBER stock currently trades at reasonable levels, but if its recent rally continues, it will only add to its bear case.
Uber went public in 2019 and, since then, hasn’t returned much to its investors. Its measly 7.1% returns have lagged the broader S&P 500 index’s 57% return by a considerable margin.
However, UBER stock has done well in the past 12 months as the economy has started to open. Despite its improved, 26% increase, it hasn’t been able to sustain the momentum.
The pandemic highlighted the fragility of the company’s business model and its peers, who witnessed a massive increase in costs. Moreover, things may get even more complicated if other states follow the lead and enact a similar bill to the California Assembly Bill 5 (AB5).
Prop 22 Effect on UBER Stock
Uber and its peers scored a major victory with Proposition 22, a California ballot measure that exempted ride-hailing platforms from AB5. AB5 is a state law that went into effect in early January 2020, which required drivers to be categorized as full-time employees.
However, in August, Judge Frank Roesch of the Alameda County Superior Court struck down the ballot measure. He stated that Prop 22 impinged on the state’s right to regulate workers’ compensation claims. Hence, Judge Roesch ruled that the ballot measure was unconstitutional. Uber and its peers plan to appeal the ruling, but the setback raises questions that mark Uber’s path to profitability.
Uber has refused to classify its U.S. drivers as full-time employees, resulting in a massive increase in operating costs. Moreover, it will also limit its ability to hire more drivers. Despite its best efforts to streamline its business, the company has been unprofitable in the past couple of years.
Its fight against Proposition 22 took a lot out of it, but the new ruling has undone its efforts. Other states may follow California and enforce similar laws to force ride-hailing companies to reclassify their drivers from independent contractors to full-time employees. Additionally, the national PRO Act, which passed in March, also allows gig economy workers to unionize against their employers potentially.
Competition Gaining
Apart from the regulatory pressures facing the company, the competition in the sector continues to shrink profit margins. It faces direct competition from Lyft (NASDAQ:LYFT) and Chinese ride-sharing leaders such as DiDi Global (NYSE:DIDI). There is a lot of substitutability between these apps as most of them come with the same or similar services. Availability is of importance, though, especially with corporate clients.
Corporations may single out a particular company if they find that a particular app has more drivers in a particular region. Furthermore, taxis may also make a comeback with applications such as Curb and Gett. Both have essentially adapted the easy operating environment of ride-hailing services to taxicabs.
In recent months, taxicabs have often had lower fares to major airports and other destinations than ride-hailing apps. Hence, there’s it won’t be long before a hefty chunk of Uber users starts considering Curb for their travel and transportation options.
Bottom Line On UBER Stock
It’s an incredibly tough road ahead for Uber, making UBER stock an unattractive bet.
Uber had a rough 2020 similar to most of its competition, but it appears that the comeback will take much longer than expected.
Its efforts to sidestep AB5 have gone in vain after Proposition 22 became unenforceable. Moreover, the competition continues to increase in the sector, which will erode profits and its market share.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Muslim Farooque is a keen investor and an optimist at heart. A life-long gamer and tech enthusiast, he has a particular affinity for analyzing technology stocks. Muslim holds a bachelor’s of science degree in applied accounting from Oxford Brookes University.
