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Stock Analyst Update

Uber, Lyft Drivers Remain as Contractors

California voters approved Proposition 22, which allows Uber and Lyft to categorize drivers as contractors.

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We continue to view narrow-moat Uber (UBER) and Lyft (LYFT) as attractive and are maintaining our $48 and $50 fair value estimates, respectively. As we assumed in our Aug. 14 note, voters in California passed Proposition 22, which allows Uber and Lyft to categorize their drivers as contractors, during the United States presidential election on Nov. 3.

With the approval of Proposition 22, the firms will not have to abide by the state’s Assembly Bill 5, or AB-5, which would have forced them to classify their drivers as employees, creating additional costs that likely would have been passed on to riders. AB-5 would have also eliminated flexibility in working hours, which is one of the main reasons attracting drivers. As proposed by both Uber and Lyft, Proposition 22 met halfway with AB-5 as it adds benefits for drivers, including a higher minimum wage, more insurance, and healthcare subsidies. While the benefits will increase costs for both firms, they are far lower than those associated with AB-5. As a result, we expect that Uber and Lyft will be able to maintain the supply of drivers in California, which is critical to the network effect both firms are building.

As the economy recovers and the coronavirus pandemic ends, we expect demand for ride-sharing to return and help Uber and Lyft once again generate strong revenue growth, leading to operating leverage and further progress toward profitability. We have not made any significant changes to our models and remain confident that both firms will generate full-year positive adjusted EBITDA in 2023 and hit GAAP profitability in the 12 months after.

We believe California voters’ decision may be indicative of what most people across the country prefer. For this reason, we expect other states to more effectively negotiate with Uber and Lyft, and reach a compromise that resembles Proposition 22.

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Ali Mogharabi does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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