Prop 22: Will Uber Survive in the Long Term?

Uber (NYSE: UBER) and other gig companies, were slammed with a verdict that made proposition 22 unconstitutional, despite spending $200 million to sponsor the proposition campaign to exempt them from the AB 5, the labor law that mandates them to treat their staff and field workers and drivers as full-time workers instead of contractors.

Photo by Humphrey Muleba on Unsplash

Prop 22 denies workers of benefits like health insurance, overtime pay, unemployment compensation coverage, and above all, the right to unionize.

However, with the judgment by Alameda County Superior Court Judge Frank Roesch declaring Prop 22 unconstitutional, although Uber and other gig companies have appealed the court judgment. What will probably be the aftermath on the stock of Uber?

Uber Stocks Nosedive After the Court Invalidation

Uber stock slumped on Monday after a judge declared Prop 22 unconstitutional Uber shares were 0.9% lower in Monday early morning trading, to trade at $39.65. Recall that the firm posted a larger than expected loss in the second quarter when it loss $509 million in July, it recorded impressive earnings per share of 58%, on revenue of $3.9 billion, but the EBITDA came at a negative margin beyond industry expectations.

A year ago, about the same period, the company posted a loss of $1.02 per share. It was understandable that it was a time when COVID-19 was ravaging the entire universe, and there was lockdown in almost all the counties of the world, so the loss was among many that international firms experienced.

Uber Experiencing Mixed Fortunes

Before the Prop 22 issue, Uber had a mixed fortune with pointers showing different things to investors. In July, Uber stock was hit with a piece of bad news regarding Softbank, a Japanese financial services provider that was disposing of most of its shares in Didi, a ride-hailing firm that does delivery services, just like Uber.

The decision by Softbank must be because of Chinese government attacks on companies listing in the United States.

The decision affected Uber, which maintains 144 million ordinary shares in Didi, valued in June at $7.3 billion, up from the initial value of $5.9 billion at the end of the first quarter.

However, the loss because of the Chinese clampdown on companies like Didi was short-lived as the company announced the acquisition of Transplace, a logistics firm, at the cost of $2.25 billion. Uber Freight department is in charge of the deal, and its payment was in cash and $750 million in Uber stock.

The deal is expected to fast-track Uber’s freight business to profitability and help the sector break even on a well-adjusted EBITDA basis before the year-end.

In what looked like a perfect year, Uber had promising earnings of 59 cents in 2018, however, the profit was short-lived; the firm lost $5.04 per share in 2019 because the firm burns through cash, 2020 was a year to forget for many companies and Uber was not an exemption, the firm, loss $3.86 per share, and according to IBD data, the gig firm was predicted to a loss $1.28 per share in 2021.

The predictions for the year 2021 did not consider Prop 22. If we factor this in, then we can say the firm is in for a tough time.

With the ride-sharing and delivery companies no longer exempted from the labor law AB 5, and the statement from President Biden’s top labor official who said “a lot of gig workers in the United States should be classified as “employees” who deserve work benefits.”

The cost of doing business may likely rise in the coming months it will be a more tough challenge for Uber to manage because most of the businesses by the company depend on people who are seeking better pay.

With heavy investment in drivers, where the company claimed to make progress and boast of active monthly couriers and drivers in the United States increasing by an impressive 420,000 from February to July, the statistics may be negative data, if the AB5 labor law is forced on gig companies.

Verdict on Uber Stock

For a firm that depends majorly on moving people around and delivering goods and services, the success of the business depends on the dedication of couriers and drivers to the tasks, it affects the time it takes to get a ride that clients are experiencing because drivers are not sufficient. As long as the gig companies are at daggers drawn with their workers, it’s better to put Uber on the watchlist.