While it may have been overshadowed
by a bigger election that took place on the same day, the results of the vote on California’s “Proposition 22” were closely watched all the same on Wall Street. In a nutshell, the passing of the ballot means that gig economy workers can continue to work as contractors, rather than being forced to become full time employees. This is particularly pertinent
for ride-sharing apps like
Uber (NYSE: UBER) and
Lyft (NASDAQ: LYFT) who’s combined 5 million-odd drivers have always operated on a contractor basis.
It means that these companies, as well as the likes of Instacart and DoorDash, are not obligated to pay a minimum wage nor provide benefit packages. For Wall Street, this means lower expenses and bottom line numbers. Indeed, such was the concern at the effect a ‘No’ vote could have had, that both Uber and Lyft had threatened to leave California had it not been passed. When the numbers were crunched, Uber estimated they would only be able to hire 3 out of every 10 drivers as employees while prices for riders would jump by as much as 100%.
Fresh Upside Unlocked
The battle for votes has been waging for months and so unsurprisingly investors haven’t been slow about seeing the fresh upside to shares, now that some major uncertainty has been removed. Uber, by far the bigger and stronger of the two ride-hailing apps, saw its shares jump more than 14% in Wednesday’s session after victory was announced. The stock traded at levels not seen since shortly after their 2019 IPO in what looks to be the start of a breakout rally.
For a while, Uber epitomized the pumped up and overhyped Silicon Valley stocks that promise so much prior to going public and then fail to deliver when on the big stage. They had to watch their shares fall more than 70% from post IPO highs through March of this year as the coronavirus pandemic did them no favors. But a 170% rally through last week had them back around their average longer term range and this week’s jump has started to push them out of there.
Investors won’t have to wait to long for another meaningful catalyst as Uber is due to report their Q3 earnings after the bell on Thursday. Analysts are looking for EPS growth of 27% year on year with revenue contraction of not more than 10%. For many bulls, hitting these prints would be a significant victory in light of the global pandemic which, through it’s driving of employees to work-from-home, has taken away those key daily commuting trips which make up so much of Uber’s ride revenue.
Smoother Road Ahead
In the days prior to this week’s vote, Wells Fargo and Wedbush had both come out bullish on both the result and on the result of the result. That is, they saw the ‘Yes’ vote happening and forecasted solid upside to shares in the event it came through, with the former describing it as a ‘watershed moment’. They both reiterated their Outperform ratings and we should be seeing fresh upgrades roll in over the coming weeks, especially if tonight’s earnings top expectations.
With the growing feeling that the worst of the pandemic is behind us, in terms of the fear and economic damage it can cause, and with the Prop 22 band aid ripped off, the road ahead of Uber is significantly smoother than it was a few months ago. They’re at the forefront of what is still a fairly new industry and are the ones behind the steering wheel. While the first 18 months of them being a public company may have been underwhelming, things are now looking brighter than they have in a long time and investors should be excited.
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