Ride-hailing and food delivery company Uber (NYSE:UBER) can’t catch a break. Neither can UBER stock investors who’ve seen the share price drop 37% in the last six months.
Call it cause-and-effect. As workers, unions and governments around the world continue to attack the San Francisco-based company’s gig economy business model, it is having a negative impact on the share price. Since mid-August, the stock has declined 8% and is now 40% below its 52-week high of $64.05.
With the company under near-constant attack for not classifying its drivers as full-time employees and paying them below market salaries and providing zero benefits, the outlook for Uber’s stock does not look good.
UBER Stock Hit by Prop. 22 Blow-Back
The latest body blow to Uber and its share price came at the end of August when a judge in California struck down “Proposition 22,” a ballot initiative that had exempted Uber from classifying its drivers as full-time employees. While Uber immediately declared that it plans to appeal the ruling, analysts see the ruling as setting a dangerous precedent that could have long-term ramifications for the company’s business.
UBER stock promptly sold off. The company had joined a consortium of other gig economy companies in spending $200 million to try and defeat the ballot initiative.
Now that Proposition 22 has been struck down in the courts, it opens up Uber to the possibility that it might have to change the classification of the people who work for it to “employees” from “independent contractors.” Making workers regular employees would require Uber to pay its drivers minimum wage, overtime pay, workers’ compensation benefits, and likely allow them to eventually unionize.
In short, it upends the way that Uber has operated since its founding in 2009 and could raise the company’s expenses sharply.
Uber currently has nearly 25,000 people working for it, ferrying people and food across 900 cities worldwide. And the U.S. is not the only country where Uber’s business model has been successfully challenged. The company was forced to guarantee its drivers in the United Kingdom a minimum wage, holiday pay and pensions following a ruling by the British Supreme Court earlier this year. Uber is grappling with other legal challenges in countries from Austria to India.
Profitability Remains Elusive
Uber remains unprofitable. Efforts at streamlining its business and divesting some of its overseas operations have not helped the company turn its finances around. Despite generating $11 billion in revenue in 2020, the company reported a net loss of $6.8 billion. Its revenue last year fell 14% owing to pandemic lockdowns and restrictions around the globe. Because of its precarious finances, many analysts have pointed out that Uber would likely be unable to classify its workers as employees and provide them with better pay and benefits without sinking the company.
Even with its ongoing struggles, Uber does retain a strong competitive advantage. The company currently enjoys a 70% share of the ride-hailing market in the U.S. and controls 22% of the market for food delivery in America, which remains its base of operations and single largest market. It’s estimated that nearly 100 million people worldwide use Uber’s services. But whether Uber will be able to convert its market leading position into profits remains a huge question mark hanging over the company and its future.
Lingering Uncertainty Weighs on UBER Stock
Some of Wall Street’s most influential analysts remain bullish on UBER stock. Morgan Stanley recently issued a report outlining five reasons why it is still bullish on the company and its shares, pointing out that Uber’s delivery business has grown 85% over the past year and that the company continues to find ways to diversify its business. The median price target on Uber’s stock is currently $70 a share, implying that the stock could rise 82% from current levels over the next 12-months.
Yet despite the upside potential, there remains a huge amount of lingering uncertainty and risk weighing on UBER stock. As such, investors would be smart to steer clear of Uber shares over the near-term. At least wait to see how the company’s appeal of Proposition 22 plays out before investing in the stock. If the company continues to lose in the courts, shareholders are likely to lose too.
On the date of publication, Joel Baglole 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.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.