28 BARRON’S October 12, 2020
TECH TRADER
Uber, Lyft, and other gig-economy companies have
spent $184 million to back a California referendum
letting themclassify their drivers as contractors.
The Election Is
A Material Event–Just
Ask Uber and Lyft
T
he debate around
Big Tech regulation
keeps getting
louder. The latest
arguments arrived
this past week in a
long and scathing
report from a U.S. House of Represen-
tatives’ antitrust panel.
The report’s 449 pages haven’t
brought Congress any closer to actu-
ally solving the dispute, and they cer-
tainly didn’t move investors, who still
sent the Nasdaq Composite up nearly
5% on the week.
It has become easy for investors to
dismiss the threat of tech regulation,
but there’s a fierce battle in California
that could actually have a material
impact on some important tech stocks.
This election day, Californians will
be voting on Proposition 22, a referen-
dum that would overturn Assembly
Bill 5, a state law passed in 2019 that
forces gig-economy companies to clas-
sify drivers as employees, rather than
contractors.
The law, which has been upheld in
state court, is a direct hit on the busi-
ness models of companies like Uber
Technologies (ticker: UBER), Lyft
(LYFT), and DoorDash, the privately
held food-delivery firm. The law is
currently stayed, pending appeal, but
the referendum could quickly put an
end to the issue, if Uber and Lyft win
voter support.
To get a sense of just how impor-
tant this measure is to the gig compa-
nies, consider that the referendum’s
five co-sponsors have contributed a
combined $184 million (and count-
ing) to the “Yes on 22” campaign, far
surpassing the $10 million spent by
opponents, mostly labor unions.
That’s by far the most money ever
spent on a California statewide refer-
endum, according to websites Ballot-
pedia and Cal Access. The total in-
cludes more than $50 million from
Uber, about $48 million each from
Lyft and DoorDash, and smaller con-
tributions from Instacart and Post-
mates.
The huge outlay eclipses the $154
million spent in 2008 in connection
with four separate proposals related
to gaming on American Indian reser-
vations.
Uber, meanwhile, has begun em-
bedding “Yes on 22” ads in their mo-
bile apps for drivers and riders.
The big push seems to be paying
off. A recent poll from the Berkeley
Institute of Government Studies found
that voters narrowly support the mea-
sure, 39% to 36%, with a large group
of voters still undecided. Other polls
show the measure with a wider lead.
RBC Capital analyst Mark Mah-
aney says passage of Prop 22 would
likely boost Uber and Lyft stocks, but
the reaction would be more dramatic
if voters nix the proposal.
“It’s obviously very important to
these businesses,” Manahey says.
“Not having to pay benefits gives them
sizable cost savings....The fact that
they are spending more than $180
million is a clear and obvious sign that
they would view a ‘No’ as a material
negative.”
Mahaney thinks a loss could push
out the breakeven point for the two
ride-sharing concerns by a couple of
quarters. In August, Uber and Lyft
both said they expected to be profit-
able by the end of next year.
B
oth of the companies went
public in 2019 to great fan-
fare, but their stocks have
been lousy since well before
the pandemic. Uber priced at $45 in
May 2019, and lately has been trading
for about $37. Lyft has been even
worse—it came public at $72 in
March 2019, and it’s now changing
hands at about $28.
This has been a tumultuous year
By Eric J. Savitz
Some ride-share
drivers, who are
independent
contractors, have
protested against
Uber and Lyft.
for ride-sharing. Covid-19 brought
business and personal travel to a
screeching halt, all but eliminating the
need to ping Uber or Lyft for a ride to
the airport or train station.
The virus also emptied corporate
offices in most major cities, knocking
out demand from ride-sharing com-
muters and shutting down midday
runs to lunches and meetings. And
the widespread closure of bars, res-
taurants, sports venues, and movie
theaters has further reduced de-
mand.
Uber stock has actually done rea-
sonably well in 2020. It’s up 25%,
while Lyft is down 35%. Uber’s out-
performance reflects its more diversi-
fied business model. While Lyft is a
pure play on U.S. ride-sharing, Uber
has benefited from its international
business and the Covid-driven growth
of its Uber Eats food delivery arm.
Uber and Lyft are the ultimate “re-
opening plays,” and Mahaney is bull-
ish on both of them. He says investors
are waiting for basic use cases to re-
emerge—airport rides, work com-
mutes, and social gatherings. His view
is that a vaccine could lead to a recov-
ery in the ride-sharing business in the
second half of next year.
He notes that the market is likely to
start discounting a recovery about six
months before a vaccine arrives,
which could get Uber and Lyft stocks
moving higher by early 2021. Both
trade at about two times enterprise
value to sales, with Uber a bit above
and Lyft a little below.
Eventually, Mahaney says, the com-
panies should be able to grow revenue
by 20% to 30% annually with gross
margins of 60% and Ebitda, or earn-
ings before interest, taxes, deprecia-
tion and amortization, margins of
20%-plus. At that point, he says, Uber
and Lyft could trade at four, five, or
even six times sales.
“It’s hard to get the timing right,
but if they can recover to growth
rates pre-Covid they could triple,”
Mahaney says of Uber and Lyft
shares. “My bias is that in 10 to 20
years, people will be traveling just as
much as they did in 2019.”B
email: [email protected] Robyn Beck/AFP/Getty Images