When Lyft (NASDAQ: LYFT) stock jumped 8.7%, closing at $78.29 on its first day of trading back in March, I felt I needed to warn people to “avoid Lyft stock like the plague.”
Unfortunately, six months later, with LYFT stock price now at $39, very little has changed about my opinion of Lyft stock. The burden is still on the ride-sharing company to prove its business model is viable. If anything, that burden has gotten much heavier thanks to the California state legislature.
Assembly Bill 5
Since their inception, Lyft and its competitor, Uber (NYSE: UBER), have classified their drivers as independent contractors, not employees. That classification allows the ridesharing leaders to avoid providing costly benefits for their workers, helping their bottom lines.
A 2019 California court ruling outlined a test to determine whether or not an independent contractor is actually an employee. The California state legislature adhered to that test in its Assembly Bill 5, which is bad news for Uber stock and LYFT.
Despite the fact that Lyft and Uber paid drivers to protest the bill, dished out big bucks for lobbying efforts and published an op-ed in the San Francisco Chronicle, AB-5 was passed by the legislature last month.
Uber and Lyft drivers in California will now be entitled to all the benefits afforded full-time employees. At the same time, the ridesharing companies will now be on the hook for massive new costs at a time when they are fighting to prove they can somehow eventually turn a profit.
AB-5 is bad news for Uber and Lyft, but it’s worse for Lyft. California generates 17% of Uber’s total revenue and 24% of Lyft’s revenue.
California Is Just The Beginning
As if the California vote wasn’t bad enough for Lyft stock, its problems don’t stop there. Other states are expected to look at the California law as a blueprint for determining whether workers are employees or contractors.
Lyft’s biggest weakness at this point is its business model. Last quarter, Lyft reported a net loss of $662.4 million.
Lyft is trying to avoid the trajectory of popular growth stock Tesla (NASDAQ: TSLA). Over the past five years, Tesla has generated some impressive revenue growth. Yet its huge investments have resulted in several capital raises, and it has yet to prove that it has a consistently profitable business model. TSLA stock is down 10% over the past five years. LYFT stock investors don’t want to find themselves in the same place five years from now.
Wedbush analyst Daniel Ives says AB-5 is a legitimate concern for the owners of Lyft stock.
“Based on our conversations with investors, we continue to see the AB5 legislation as a dark cloud casting long shadows on shares of Uber and Lyft,” Ives says.
Not as Bad as It Seems?
Ives says Uber and Lyft may ultimately negotiate a middle ground with drivers in California.
“It’s a clear financial negative, but we think ultimately a more middle-ground approach is settled on as we expect Uber, Lyft, and other gig economy companies will reduce hiring and reduce flexibility of its workforce in California, offsetting the positive protection measures drivers will get,” Ives says
In other words, Lyft will attempt to offset the new AB-5 costs by hiring fewer drivers. In the meantime, Lyft, Uber and Doordash have raised $90 million to support a ballot initiative to establish a new classification of worker called a “network driver.” If it passes, the initiative would help mitigate the full costs of AB-5 for LYFT and UBER.
Ives is still relatively optimistic about the situation. He says a middle-ground approach makes the most sense. But it may take a long time and an exorbitant amount of lobbying and legal fees to create that middle ground. Uber and Lyft, however, may eventually get to the point where AB-5 and similar laws nationwide won’t completely undermine their business models.
The Bottom Line on Lyft Stock
If the analysis surrounding the impact of AB-5 seems convoluted and confusing to you, you’re not alone. It seems that way to me, too. I would argue uncertainty is the biggest reason not to invest in LYFT.
Lyft stock isn’t as expensive as it was six months ago. But the company’s fundamentals are just as unclear. If anything, AB-5 and the subsequent legal challenges and responses to it by other state legislatures have made the outlook of LYFT stock even more unpredictable.
LYFT is a cool idea, and Lyft users are free to rave about how easy and awesome the service is. It sounds a lot like the kinds of things Tesla owners said about their cars five years ago. If you love using Lyft, go for it. Just do yourself a favor and stay away from LYFT stock.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
