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Should You Buy Uber or Lyft After a Judge Shot Down Proposition 22?

Investors are still deciding what to do with Uber and Lyft stocks after a California judge struck down Proposition 22. The case could take years to so...

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This story originally appeared on MarketBeat

Investors are still deciding what to do with Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) stocks after the companies received a legal setback. On August 20, a California judge struck down Proposition 22, a California ballot initiative that exempted ride-hailing and some other delivery services from the state’s AB-5 law that required drivers to be classified as employees.  

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This would mean that Uber and Lyft have to provide benefits and other job protections for drivers who were classified as “gig workers.” However, after an initial drop, both stocks are trying to find their footing. And with both stocks trading well below their 52-week high, it’s a good time to ask if either or both are good buys at this time. 

Two Sides of the Story 

Uber and Lyft gained popularity because of their business model. Namely that their drivers were independent contractors, not employees. The companies view themselves as technology companies that provide a service, in the form of an app, for customers to use to find transportation.  

From Uber and Lyft’s point of view, driving for them was never intended to be more than just a part-time gig. It was a side hustle. The problem is that drivers haven’t necessarily followed the script. And here’s where it gets complicated. 

As ride-hailing services gained popularity, the drivers that performed this service started to see things differently. Many made the decision to drive much closer to full-time. And without benefits, these drivers are flying without a net. As the Covid-19 pandemic made clear, it’s a long way down when demand for your business dries up. 

Drivers faced the double whammy of a revenue stream that no longer existed. So they lacked the ability to pay for such things as health insurance and didn’t qualify for unemployment insurance.  

This led Uber’s CEO Dara Khosrowshahi to petition the Trump administration to allow independent contractors the same pandemic protections that employees received. This was bad optics at best because the perception simply was that the companies were asking the government to provide what they wouldn’t provide themselves.  

The Legal Battle Will Continue 

The first thing investors need to understand is that the legal battle is likely far from over. As Barron’s reported, the ruling is expected to be stayed pending appeal. That means that, for now, it’s business as usual for both companies. And at least one analyst, Needham’s Bernie McTiernan, states there is a “lack of precedent for ruling against ballot initiatives.” If an appeals court agrees this could all be much ado about nothing.  

Either way, this case is likely to make it all the way to the California Supreme Court – and since the wheels of justice tend to move slowly, it will likely be 2023 before there is a final ruling.  

Evaluate the Stocks For What They Are Today 

The global ride-sharing market is expected to be worth $185.1 billion by 2026 and grow at a Compound Annual Growth Rate (CAGR) of 16.6% from 2021 to 2026. Both Uber and Lyft recently reported strong top lines. Lyft remains unprofitable although it has guided that it will turn a profit in late 2022. For its part, Uber posted its first quarter of positive earnings in the last quarter. It remains to be seen if that is a long-term trend.  

Uber has moved aggressively into the food delivery space. This encourages drivers to spend more time on the platform. While this has been a lift to the company’s revenue, it’s a space that is getting very crowded. Lyft has a relationship with GrubHub (NASDAQ:GRUB), but it’s not nearly as tied into the sector.  

It’s difficult to advocate taking a long position on either company until this issue is resolved one way or another. If the companies are forced to classify drivers as employees, it will cost millions of dollars. But with time on their side, I don’t necessarily believe bankruptcy is likely for either company.  

Ultimately these costs will be passed along to the consumer who will either accept them or they won’t. My guess will be that they will, and that Uber and Lyft will probably employ fewer drivers who will now become more like shift workers. The whole thing kind of feels like a “be careful what you wish for” proposition for consumers and the drivers.  

Analysts are bullish about both stocks. According to MarketBeat data on Lyft, five analysts have boosted their price target in the last 30 days. The consensus 12-month price target for LYFT stock is for a gain of over 47%. Analysts have an even more bullish price target for UBER. They see the stock climbing over 65% in the next 12 months. However, the company has had its price target lowered by three analysts since it reported earnings on August 4. And all of those came in at least two weeks prior to the judge’s ruling.  

So if you’re looking at buying either UBER or LYFT, you should be using a 12-month time horizon at the most. And in that scenario, LYFT may be the better buy. In a shorter term, UBER looks like it has a more promising setup and valuation, and with Covid concerns still lingering, it will benefit from its food delivery service.  

But over time, I think that the food delivery business is easy to copy. And Lyft, because it’s not as focused on meal delivery, may have a more straightforward path.