Investors may be shrugging off recent regulatory headwinds when it comes to Lyft (LYFT) stock. Shares in the rideshare app operator initially dipped on news of an August 20 California state court decision that could mean an end to gig workers being classified as independent contractors in that U.S. state.
Yet, as more investors and analysts became bullish that the company, and its rivals such as Uber (UBER) seemed poised to win on appeal, shares began bounce back. The stock went from under $45 per share, to briefly back above $50 per share, before closing out the week ending August 27 at around $48.39 per share.
This market reaction makes sense, as the rideshare industry has so far been successful combating the backlash over its labor practices. Investors might be correct at believing regulatory risks are overblown. On the other hand, various factors at play could result in Lyft making more moves lower in the months ahead.
Between the U.S. labor crunch, its profitability challenges, and a rich valuation, there’s still more in play to send it lower than to send it higher from here. This author is bearish on the stock. (See Lyft Stock Analysis on TipRanks)
LYFT Stock and The Overturning of Proposition 22
The U.S. federal government has yet to put in place changes to how gig workers are classified. Instead, in recent years, the battle’s been playing out on the state level. U.S. states like California have attempted to change labor practices believed by critics to be unfair.
Back in 2019, California passed a bill known as AB5. This bill would have made it so that gig worker platforms would be required to classify workers as employees rather than as independent contractors.
A change in classification means higher labor costs. As employees rather than an contractors, gig platforms would have to adhere to employment law, and pay unemployment insurance taxes. Yet, well-connected and well-financed, the gig platform industry fought back and won. Its financial backing of Proposition 22 helped the proposition to be passed by voters in November 2020.
Prop 22 exempted app-based transportation and delivery companies, such as DoorDash (DASH), from the provisions of AB5. Yet last week’s court decision, mentioned above, overturned this exemption. Chances are, though, that nothing much is set to change, in practice. Why? The gig platform industry still has options to fight back.
Three Other Issues Still Weighing Down on Shares
Likely to appeal the decision, major gig platform operators may not be immediately under threat by this recent court decision. Yet that doesn’t guarantee LYFT stock will continue to trend higher. Three factors that have pushed it down from its 52-week high, of $68.28 per share, to today’s prices, could remain in effect.
First, the U.S. labor shortage. The COVID-19 “reopening” has helped to bring back demand for its platform. However, said reopening has also reduced the supply of drivers. Many former and would-be drivers have found better gigs/jobs elsewhere. As a result, the company had to pay up in the form of driver incentives. Wedbush analyst Daniel Ives has recently said that this will affect the company’s near-term results.
Second, Lyft’s continued issues with becoming profitable. Analysts project the company will finally get out of the red in 2022. Yet if challenges like the labor shortage remain an issue going into next year, it may be unable to hit these projections.
Third, valuation. “Taper talk” notwithstanding, the Federal Reserve’s aggressive monetary policy remains in place. This has helped to sustain the rich valuations of fast-growing tech names like this one. All the same, if we see these policies change from dovish to hawkish sooner than anticipated, LYFT stock could see further multiple compression.
What Analysts are Saying About LYFT Stock
According to TipRanks, LYFT stock has a consensus rating of Moderate Buy. Out of 22 analyst ratings, 14 rate it a Buy, 8 analysts rate it a Hold, and 0 analysts rate it a Sell.
As for price targets, the average Lyft price target is $74.74 per share, implying around 54.45% in upside from today’s prices. Analyst price targets range from a low of $59 per share, to a high of $88 per share.
Don’t Expect Lyft to Get a Lift Back to Prior Highs
The recent California court decision may not be the end of the world for Lyft. The gig app industry appears well-positioned to fight off the push to have its workers reclassified.
That alone likely won’t translate into LYFT stock getting a lift back to its 52-week high. Instead, the three other factors mentioned above will likely apply more downward pressure.
Disclosure: At the time of publication, Thomas Niel did not have a position in any of the securities mentioned in this article.
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