The California Supreme Court on Thursday upheld a ballot measure that allows app-based companies like Uber and Lyft to classify drivers as independent contractors. But Uber stock appeared little helped in trading Thursday and Friday. One analyst says the ruling came largely as expected by investors.
The court ruled that the state's 2020 Proposition 22 is constitutional. The ballot measure allows companies such as Uber, Lyft and DoorDash to classify their employees as independent contractors. A group of ride-share drivers and labor unions challenged the constitutionality of Proposition 22 in 2021. The legal fight culminated in Thursday's state Supreme Court ruling.
On the stock market today, Uber stock is down 1% at 65.12 after losing a half-percent Thursday. Lyft stock is trading sideways near 12.25 after losing 1.4% Thursday.
DoorDash stock, meanwhile, lost 1.6% Thursday but is up 4% near 104.50 in recent action today. Earlier Friday, analysts with Redburn Atlantic initiated coverage of DoorDash stock with a buy rating.
Why Prop 22 Matters To Uber, Lyft And DoorDash
Lawmakers across the globe are grappling with whether drivers and couriers working on app-based services such as Uber, Lyft and DoorDash should be considered employees. California is a major battleground for that debate. Uber, Lyft and DoorDash are all headquartered in the state.
Proposition 22 was Uber, Lyft, DoorDash and Instacart's response to Assembly Bill 5. Often called AB 5, the 2019 state law extended employee status to many types of contract work. It entitled workers to a minimum wage and workers' compensation, among other benefits.
Viewing that as a major threat to the so-called gig-model the companies rely on, tech firms pushed for a ballot measure that exempted their businesses. Under Prop 22, companies can classify drivers as independent contractors, as long as they are paid at least 120% of the state minimum wage while engaged in a gig job. They also must be able to receive reimbursements for expenses, among other provisions.
Tech companies led by Uber, Lyft and DoorDash spent a combined $200 million on the campaign for Prop. 22 before voters approved it.
Uber Stock: Legal Battle Already Priced In?
Before the ruling, Jefferies analyst John Colantuoni wrote to clients that the risk of Prop 22's repeal has been a "key overhang" for Uber stock, Lyft and DoorDash. That implied a "favorable judgment tomorrow would drive a positive reaction," he told clients in a note late Wednesday.
However, Colantuoni told clients to "expect the actual stock reaction from the ruling to be smaller, given current valuations likely embed some probability of a positive ruling." He said that was particularly true following the Justices' comments during oral arguments.
Jefferies estimates that reverting back to AB 5 would result in additional costs equivalent to 65% of Lyft's estimated 2025 earnings before interest, taxes, depreciation and amortization (EBITDA). It would equal 40% of DoorDash's estimated 2025 EBITDA and 10% of Uber's 2025 EBITDA, according to Jefferies estimates.
DoorDash will report second quarter earnings on Aug. 1. Uber will report Q2 results on Aug. 6. Lyft will report its quarterly results Aug. 7.
Uber and Lyft stock have slumped for several weeks amid concerns about Tesla launching a robotaxi service that's many expect will compete for riders.
Uber And Union Leaders Respond
In a statement published to the company's website Thursday, Uber said the decision represents a win for drivers.
"Whether drivers or couriers choose to earn just a few hours a week or more, their freedom to work when and how they want is now firmly etched into California law, putting an end to misguided attempts to force them into an employment model that they overwhelmingly do not want," the company said in a statement.
Union leaders, meanwhile, criticized the ruling. In a statement Thursday, Lorena Gonzalez, president of the California Labor Federation AFL-CIO, said the decision allows "tech corporations to buy their way out of basic labor laws."
"AB 5 granted virtually all California workers the right to be paid for all hours worked, health and safety standards, unemployment insurance, workers' compensation, and the right to organize," Gonzalez added. "Ride-share and delivery drivers deserve those rights as well."
