Ride-Share Stocks Rally After Favorable Court Decision

Shares of Uber Technologies, Inc. (UBER) and Lyft, Inc. (LYFT) shook off mounting losses on Thursday after an appellate court granted a delay in the implementation of a new California law that requires many so-called "gig workers," including drivers for ride-share companies, to be reclassified as employees. Drivers are now independent contractors, making their own hours but having no access to benefit plans or workers' compensation coverage.

Key Takeaways

  • Uber and Lyft have been losing money since coming public in 2019.
  • Uber has a stronger balance sheet and more diverse revenue streams than Lyft.
  • The COVID-19 pandemic has greatly affected ride-share revenue at both companies.
  • A November ballot initiative could cancel out the California law.

Neither company has posted a profit since coming public in 2019, although they expected to achieve that goal later this year or in 2021. The COVID-19 pandemic has thrown up a major roadblock in their paths to profitability, with plunging ridership due to concerns about contracting the infection. The California mandate couldn't come at a worse time, raising doubts about the industry's long-term viability.

Uber and Lyft now have to submit sworn statements that include implementation plans by Sept. 4, with those documents having compliance power if the original decision is upheld and a November ballot initiative fails to pass. It will be instructive to read those missives because the companies have the option to reclassify workers as employees, pull out of California, and/or shift to franchise-based business models.

Lyft has the most to lose in coming months because it runs limited food delivery services, while according to Uber, current litigation does not cover its hugely successful UberEats. This popular service has underpinned company income since the first quarter shutdowns and is a major component in future plans. A merger is also possible if efforts to sidestep the law fail, perhaps creating one larger operation that can handle the impact of employee benefits.

A franchise is a type of license that a party (franchisee) acquires to allow them to have access to a business's (franchisor) proprietary knowledge, processes, and trademarks in order to allow the party to sell a product or provide a service under the business's name. In exchange for gaining the franchise, the franchisee usually pays the franchisor an initial start-up and annual licensing fees.

Uber Short-Term Chart (2019 – 2020)

Uber came public at $42 in May 2019 and posted an all-time high at $45.09 in late June. The subsequent decline cut through the IPO opening print, finally settling in the mid-$20s in November. Buyers took control into February 2020, posting a lower high, ahead of a vertical decline that hit an all-time low at $13.71 in March. The stock bounced strongly off that level into the second quarter, but the uptick stalled about three points below the prior high in June.

A selloff into July found support near $28.50, giving way to a rectangular consolidation across the narrowly aligned 50- and 200-day exponential moving averages (EMAs). The stock tested range support on Thursday and bounced strongly, posting higher-than-average volume. This trading floor should hold firm until the November election or when polls reveal that California voters aren't interested in bailing out these controversial companies.

Lyft Short-Term Chart (2019 – 2020)

Lyft came public at $88.60 in March 2019 and entered an immediate decline that found support in the mid-$30s in October. Buyers lifted the stock into a lower high in the mid-$50s in February 2020, while the selloff into March sliced through the 2019 low before posting an all-time low at $14.56. A bounce into the second quarter recouped a smaller percentage of losses than its rival, highlighting a less robust balance sheet and path to profitability.

The recovery wave reversed at the 200-day EMA, which the stock has never mounted, reinforcing resistance in the low $40s. It sold off to a three-month low ahead of Thursday's turnaround, which posted the strongest buying volume in the company's 17-month public history. Even so, Lyft accumulation-distribution readings are much weaker than Uber, slumping near all-time lows while its rival shows healthy buying interest.

A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time, providing a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders.

The Bottom Line

Uber and Lyft stocks bounced on Thursday after an appeals court delayed the implementation of a law requiring them to reclassify drivers as employees.

Disclosure: The author held shares of Uber in a family account at the time of publication.

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