Uber’s UBER -4.23% shares hit record highs last month, as investors saw nothing but open road ahead with the pandemic easing and the world opening back up. Now a court ruling could make for an unforeseen roadblock.
After losing a recent legal battle in the U.K., Uber said it would reclassify its ride-hailing drivers as “workers” there. While the new classification falls short of full-blown employee status, it differs from how California voters elected to treat Uber’s drivers and other gig-economy workers, who are treated as independent contractors in the state. It also comes with added costs that could derail Uber’s profitability timeline as it races key U.S. competitor Lyft out of the red.
As a result of the reclassification, Uber said it added vacation pay and pension contributions for its ride-hailing drivers in the U.K, effective Wednesday. In an 8-K filing on Wednesday, Uber said it doesn’t currently expect those costs to alter its previous forecast for adjusted earnings before interest, tax, depreciation and amortization for the first quarter or the full year. Uber said previously it should achieve break-even on that basis at some point this year.
Wall Street is beginning to see cracks in Uber’s logic, though, sending shares down 5% on Thursday. Before the U.K. ruling, analysts were forecasting that Uber will still be loss-making this year, but post adjusted Ebitda profits of $9 million in the third quarter and $190 million in the fourth quarter, according to consensus estimates from FactSet. The new classification won’t help, according to Morgan Stanley analyst Brian Nowak, who estimates the new U.K. compensation changes will cost Uber roughly $250 million to $350 million each year for 2021 and 2022.
Because the U.K. court’s ruling dealt only with ride-hailing drivers, classification of Uber’s Eats drivers won’t be affected. Furthermore, Uber said its U.K. mobility business is a relatively small part of its overall business, accounting for just 6.4% of its global mobility gross bookings last quarter.
Still, increased losses look likely any way you cut it. Uber could choose to pass along some of the added costs to U.K. consumers, much like it has done in California with new costs associated with Proposition 22. But because it is the only ride-hailing company affected by the U.K. court’s ruling, it would likely be the only company to raise costs. That may lead to fewer bookings, as cost-conscious consumers opt for lower-cost ride-hailing services in the country, such as Bolt or Ola Cabs.
Uber’s mobility business has recently been a profit driver, while its fast-growing Eats business continues to generate losses. As consumers head back out to restaurants this year, Uber will likely need to lean even harder on the recovery of its mobility business to meet its profitability target. Meanwhile, as of January, Uber said bookings for its global mobility business were still down 49% year on year, factoring in currency fluctuations.
Lyft, for a change, is seeing the benefits of being a U.S.-centric business and could now be poised to see profitability before its larger competitor. The company said last month it could see profits on the basis of adjusted Ebitda as early as the third quarter of this year.
Uber’s U.K. business may be small, but the recent court ruling leaves many other controversial questions surrounding gig economy workers unanswered. Should drivers be paid for the time they spend waiting to accept rides? Will there be ripple effects seen across other European countries? Will Eats drivers be next?
Each of these could drive Uber’s hope for near-term profits that much closer to empty.
Write to Laura Forman at [email protected]
Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
