Against a discouraging legal backdrop, Lyft (NASDAQ:LYFT) gained 4% on Wednesday morning before shooting up 7% in the afternoon session. Although a White House proposal to reclassify independent contractors — or, colloquially, gig workers — as employees weighed heavily on LYFT stock, one analyst believes that the pessimism has gone too far. Still, the positive assessment faces severe challenges against a tough legal and political headwind.
Specifically, Gordon Haskett analyst Robert Mollins issued a “buy” recommendation on LYFT stock, citing “overly negative” sentiment. In addition, Mollins cited several potential positive catalysts for the ride-sharing platform. Previously, the analyst had rated LYFT as a “hold.”
Acknowledging that rival Uber (NYSE:UBER) held significant advantages over the smaller outfit, the combination of the “material” underperformance of LYFT stock, relative valuation discount and excessively negative investor sentiment will yield a circumstance where any news (barring truly terrible disclosures) will help Lyft.
Further, MarketWatch stated that Mollins cited “improving driver supply and conversion rates, continued shared-ride adoption, upfront-pay capability and the return of employees to offices” as positive catalysts for LYFT stock.
At the same time, a reclassification of independent drivers using Lyft’s platform as corporate employees could impose significant costs to the business. Per Gurufocus.com, Lyft’s retained earnings line item comes in at a loss of $8.93 billion.
LYFT Stock Faces Steep Legal Challenges
Despite the significant pop higher for LYFT stock, shares still slipped 13% over the trailing five days. Arguably, most of this volatility centers on the underlying company facing an existential crisis.
According to the proposed reclassification of gig workers, the “rule would put in place a more stringent test to determine when companies can count workers as contractors rather than employees,” per the Wall Street Journal. “Under labor law, employees are eligible for protections such as the minimum wage, medical leave or overtime pay that don’t apply to independent contractors.”
A complex legal issue, both contract-issuing companies and the independent contractors themselves must demonstrate broader independence. Particularly, gig workers must show that they are truly in business for themselves. This includes key matters such as setting their own schedule, operating without supervision from contract issuers and negotiating compensation.
Per the WSJ, the “Labor Department will take public comment on the rule for 45 days. The administration likely won’t finalize the rule until next year.” That gives LYFT stock time, but clarity will be crucial moving forward.
For Lyft, a reclassification will likely lead to cost burdens, since employees typically receive benefits. Further, a legal shift may see an unsustainable race to attract the most employee drivers. That might leave LYFT stock out in the cold compared to bigger rival Uber.
For gig workers, a transition to employee status will eliminate business deductions, thus straining opportunities for tax liability reductions. Of course, that has huge economic and political implications at scale. Therefore, while the overall narrative imposes pessimism on LYFT stock, investors can expect a raging debate to materialize.
On the date of publication, Josh Enomoto 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.