The Biden administration and newly appointed Secretary of Labor, Marty Walsh, are trying to rid the US of the new gig economy that has provided millions of US workers with the flexibility to make money on their time. The Labor Department announced early this week that it would be rolling back a Trump-era regulation that made it easier for enterprises to classify their drivers as gig workers or independent contractors. This action does not immediately force gig economy businesses to reclassify their workers, but it does open the door for Congress to pass a bill that would do just that.
Uber UBER, Lyft LYFT, DoorDash DASH, and Fiverr FVRR are all tumbling again today following a week of worry about the costs that would be associated with reclassifying their workers as employees. In the past 7 days of trading, UBER shares have fallen 20%, LYFT has plunged 21%, FVRR is down over 19%, and DASH saw an over 23% share price decline.
If the gig economy had to reclassify its workers, it would completely change the internal structures of these companies and weigh very heavily on their ability to ever turn a profit. Marty Walsh has been a union man since he was 21 years old (before going into politics), and his archaic positioning on the matter illustrates his bias. Walsh has designs to turn this gig economy into a unionized one, "giving power to the drivers." In reality, Walsh would be destroying something that many Americans rely on for supplementary income, the ability to work and make money whenever/wherever they want.
Many gig workers work for multiple platforms and switch back & forth between them depending on the amount each is willing to pay them at the time. This creates an intrinsically competitive environment that forces each company to pay an equitable rate to their drivers if they want to retain them. Most gig workers don't want to be classified as employees because they would lose the flexibility that got them into the position in the first place. We saw this exemplified last November with the passage of Prop 22 in California, which kept the gig economy alive in the golden state.
The Biden administration would need to rewrite the Great Depression-era Fair Labor Standard Act to apply to this new digitalized age to force these gig-driven companies to reclassify their workers. I see this as an outlier on the spectrum of possibilities, with its probability being very low. Principal deputy administrator for the Labor Department's Wage & Hour Division explained that the department was working with these app-based corporations to come to an equitable arrangement (ostensibly).
Uber is the best-positioned ridesharing/food delivery business, with its Rides segment already turning an operational profit. Uber's Eats business hedged them amid the pandemic and will continue to be a driver in the post-pandemic world on their way to profitable growth. Uber achieved operational profitability from its Rides segment long before Lyft (who claims it will reach a positive EBITDA by Q3), and it's only a matter of time before this is achieved in its delivery business.
Suppose by some crazy chance gig workers are reclassified as employees and unionize. In that case, I think Uber is the only company capitalized well enough to manage this cost shift, and I'm sure that they already have a team preparing for this low probability scenario.
Uber reported a record level of gross bookings but missed on sales because of its reclassification of UK workers, which reduced the business’s net revenue by $600 million (adjusting accruals for the resolution of historical claims). This quantified the cost impact of reclassifying workers in one of Uber’s smaller markets, instilling fear in investors with the Biden administration ostensibly aiming to get rid of the US’s gig economy.
UBER’s trading at its most oversold RSI levels since the depths of the pandemic, and I believe that the market is over reacting to this low probability scenario. UBER is utilizing its 200-day moving average as a support level, and it looks to be time to add to this position if you already hold the stock or start a position.
I believe the downside market is a knee jerk reaction, and this dip is an opportunity to buy, with an average UBER price target of $68 (over 45% upside).
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