Unwelcome News Drives Down Uber Stock

Uber Technologies Inc. (NYSE: UBER) has had a tough week and it’s not even Friday yet.

A failed merger attempt and a decision by California regulators have put pressure on the stock. Shares of Uber dropped by 4.81% Wednesday to $34.83. The downward trend was continuing Thursday, with the share price down more than 7% at midday.

On Tuesday, the California Public Utilities Commission ruled that drivers for ride-sharing services, including Uber and Lyft (NASDAQ: LYFT), are employees under a new state law covering “gig work.”

“For now, TNC drivers are presumed to be employees and the commission must ensure that TNCs comply with those requirements that are applicable to the employees of an entity subject to the commission’s jurisdiction,” CPUC Commissioner Genevieve Shiroma wrote, referring to transportation networking companies.

A Law That Challenges a Business Model

Six months ago, a state law known as AB5 took effect in California, making it more difficult for companies to classify workers as contractors instead of employees. Companies are exempted from paying contractors for overtime, health care and workers’ compensation.

The business models for both Uber and Lyft are built around having contractors do the driving. They have resisted efforts to classify drivers as employees and have contended that a majority of the drivers prefer to be contractors.

Uber released a statement saying: “Uber remains committed to expanded benefits and protections to drivers. If California regulators force rideshare companies to change their business model it could potentially risk our ability to provide reliable and affordable services along with threatening access to this essential work Californians depend on.”

“CPUC’s presumption is flawed; drivers are correctly classified as independent contractors and overwhelmingly want to remain independent contractors — 71% in the latest independent poll, even after the impacts of COVID,” Lyft said in a statement. “Forcing them to be employees will have horrible economic consequences for California at the worst possible time. That’s why we’re supportive of a ballot measure that gives drivers important new benefits while allowing them to remain independent.”

Taking the Matter to the Courts

Late last year Uber sued the State of California, seeking exemption from the AB5 law, just before it took effect. In May, California State Atty. Gen. Xavier Becerra and the city attorneys of Los Angeles, San Diego and San Francisco sued Uber and Lyft, contending that they illegally treat their drivers as independent contractors.

Uber and Lyft have also put millions of dollars into a ballot initiative to create a third category of worker, one that would be a hybrid of employee and independent contractor.

On Wednesday, Uber suffered another blow when news broke that Grubhub was going to merge with a European food delivery company called Just Eat Takeaway. Uber had been in talks to merge Grubhub with its Uber Eats division.

The all-stock deal is expected to close in the first quarter of 2021.

“Like ridesharing, the food delivery industry will need consolidation in order to reach its full potential for consumers and restaurants,” an Uber spokesperson said, according to CNBC. “That doesn’t mean we are interested in doing any deal, at any price, with any player.”

Uber Eats gained importance in recent months because of the coronavirus pandemic. As millions of people obeyed curfews and stay-at-home orders, the demand for Uber rides plummeted. At the same time, food delivery services, like DoorDash, Grubhub and Uber Eats, saw huge increases in orders.

While none of the major food delivery services are profitable, Uber chief executive Dara Khosrowshahi has maintained that the problem could be solved by scaling up its delivery division.

One Bright Spot

The news this week has not been all bad for Uber. Analysts still have a positive view of the ride-hailing company and another voice was added to the chorus on Wednesday.

BTIG Research began coverage of Uber with a Buy rating and a target price of $47.

Uber has a consensus rating of Buy among 38 analysts, with 35 Buys, 3 Holds and no Sells. The median target price is $42.24.