Prop 22: ‘The fight isn’t over’ for Uber and Lyft drivers, analyst says

A judge in California invalidated a 2020 ballot initiative, exempting ride-hailing services like Uber and Lyft from a state law that would require its drivers to become employees. Jason Helfstein, Head of Internet Research and Managing Director at Oppenheimer & Co., joins Yahoo Finance Live to discuss how Uber and Lyft are trading after the court ruling and the outlook for gig economy.

Video Transcript

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JULIE HYMAN: A court ruling in California that affects Uber, Lyft, other companies that use independent contractors. The ballot measure that made it law that they were in fact independent contractors, has now been ruled unconstitutional and unenforceable by a California superior court judge. What does that mean for these companies?

Jason Helfstein is here to help us sort it out. He's head of internet research and managing director at Oppenheimer. Jason, good to see you. So it seems like this is not the end of this, right? That this-- it doesn't mean the law goes away immediately is my understanding. And we could still see a court battle here. But I imagine it means higher costs for these companies, again, from this legal battle.

JASON HELFSTEIN: Yeah. I mean, no one's changing their business practices. Drivers are not getting paid more. I don't think they're going to-- You know, there's no plans to, kind of, keep working the system to kind of change anything. But I think what it tells you is the fight is not over, right? This is-- and this is really if we kind of take a step back, there is a brewing, kind of, fight between the new economy, the gig economy, Amazon, which is on track to be the largest employer in the United States at some point in time, and unions.

And California appears to be one of the states where they want to fight that fight. I think the companies decided that this is a, kind of, goes against 100 years of precedence, where effectively a judge is over ruling the will of the people, this will get appealed. It will go to a higher court at some point. Does this go to a Supreme Court? It wouldn't surprise me overtime if that was the case. But yeah.

I mean, this is going to be overhanging for a while. I mean, I don't think this is necessarily what has been an issue for the stock and we can talk about that. But this is not going away for a while.

JULIE HYMAN: Yeah. I do want to talk about what the issue is for the stock. Sorry. This is my ventriloquist routine with Brian Sozzi. There we go. I do want to talk about that. But just to linger on this for one moment, you've mentioned that it's an overhang for these types of companies. How big is an overhang? How much, when you're, sort of, modeling these stocks, how much is it costing them? How should investors be thinking about it?

JASON HELFSTEIN: Yeah. I mean, look. The companies won't disclose the exact impact of, we'll call it the hybrid status plan, which is what they're using in California. They've kind of implied it is a drag on, kind of, the profitability. They do pay the drivers a little bit more. They say it's not-- and they do pass some of that higher costs on to consumers. There have been questions of, does that have an impact on consumer demand? But they are saying no. However, you know, we've been watching this through COVID and so it's not like we're seeing, kind of, a normal kind of demand.

So if we had to guess, we'd say it's probably like a high single digit type of impact on profitability in those markets potentially offset by higher pricing. But then, you know, so it's-- there's kind of a lot of unknowns where I think the company was comfortable with the hybrid pricing and it was factored into street estimates. So if things don't change, I think the Street is probably modeling the profitability correctly. If ultimately something really goes against them and they can't do this and they have to make the drivers employees in those states, it just-- it changes the business model, right?

I mean, the whole idea is them not being employees and drivers can jump from one service to another for a few hours a week or a lot of hours a week. It just changes the business model, ultimately, if they have to make the drivers employees.

BRIAN SOZZI: Should one be a buyer on this weak-- on this weakness in Uber and Lyft? And if you had to choose, which one would you gravitate towards?

JASON HELFSTEIN: Yeah. So we don't have a formal rating on Lyft, so we would say buy Uber. So yes. And the bigger overhang on the stock has actually been SoftBank. We think they've been having margin calls around their China positions. And as a result, they've been liquidating US positions and, namely, Uber. And so we think that has actually been the biggest overhang on the stock and we don't think that's fundamental.

But yes. We think, ultimately, look. You do have technically a conservative Supreme Court. I do think it will take a long time to get there if that's ultimately the case, but and-- the companies do have ways to make adjustments to the app to try to, let's just call it, hack the rules. But I don't think anybody really wants to go in that direction.

But we think it's really-- at the end of the day, if most voters want something, we think it's really hard over time for the government to go against that. So we would use this weakness as a buying opportunity. I would note that if you look at where the stock is trading right now and you put, kind of, a seven times multiple on the foods business, the delivery business, which would be like a 30- 40% discount to where DoorDash is trading right now, you're getting the rides business for free. So there's a lot of negativity discounted in the stock here.

JULIE HYMAN: Jason, I'm going to take it real personal for a second and ask about a risk to Uber and Lyft, which again, I know you don't have formal coverage on. So I was recently going to a concert in Atlantic City, tried to order an Uber. Tried to order a Lyft. Wasn't working out. First, it was expensive, then they canceled, didn't show up. And so I ended up taking one for the team and I drove myself. And I wonder how many other people are making these kinds of decisions lately. Because as we all know, ride share is getting a lot more expensive and it's a lot harder to find a car. How much of a challenge is that for these companies?

JASON HELFSTEIN: Yeah. I mean, this has been discussed for a while. I mean, kind of, in the second quarter, we saw a 52% sequential increase in the number of, kind of, driver downloads as a proxy. Lyft, we saw 23% quarter to quarter increase, right? So you are seeing, kind of, third party data supporting that they are bringing more drivers on the platform.

The government-- federal government just announced they will not extend enhanced unemployment insurance. They did hint that some states could find a way to offer that. So who knows? But it does seem like, to an extent, that was a headwind for some drivers to come back, that that should get better.

So I think people are optimistic that, kind of, in the month of September, driver supply continues to get better. Albeit, remember, this is a-- there is a flexible model, right? To the extent that if you didn't want to take it because it was too expensive and people who have plenty have started saying they're back to taking yellow cabs in New York because it's like a third of the price or half the price.

But to the extent, somebody is taking it, right? Because it is a supply-demand based kind of model, right? So if you can't get a ride, it usually means somebody is willing to, kind of, pay for that ride. So at the end of the day from a revenue standpoint, I don't think it's as big of a drag as we would think. But yeah. But that's really bad from a consumer standpoint, to your point, right?

Because at the end of the day, these services are really about repetitive behavior. And if ultimately, ridesharing was your go-to to get around and not thinking about a taxi or driving yourself, you know, we don't want that, right? And that ultimately will drive up customer acquisition costs to Uber and Lyft is they have to, kind of, reacquire you if you've already changed your behavior.

So I get it. But look. I do think the companies clearly acknowledge that. Uber said they were leaning into driver supply very significantly in the second quarter. I actually think, again, they're ahead of where Lyft is. But again, I do think things will get better post Labor Day.

JULIE HYMAN: Maybe I should have just registered with the companies and then I could have taken other people with me also. Jason.

JASON HELFSTEIN: There you go.

JULIE HYMAN: Thanks so much.