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After Prop 22 vote, all eyes are on Uber earnings

After Prop 22 vote, all eyes are on Uber earnings

Uber investors breathed a sigh of relief this week as Californians voted to pass a ballot measure that defends the business model it pioneered by allowing it to continue treating its drivers as independent contractors in the state, rather than employees.

The company's stock rose nearly 15% Wednesday on news that the Proposition 22, or "Prop 22," had passed.

With Election Day behind it, the company must now confront investors about other significant issues, like when it will stop losing billions of dollars and the ongoing negative impacts of the coronavirus on its business.

Uber reports its third quarter earnings after market close Thursday. The company's revenue is expected to decline to $3.2 billion compared to $3.8 billion during the same period last year, and it is expected to post a loss per share of $0.65, or an estimated loss of $1.1 billion, compared to a $0.68 per share loss during the same period last year, according to analyst estimates compiled by Refinitiv.

Here's where Uber stands and what analysts are watching for.

One cloud over its business has cleared


Tom White, an analyst at DA Davidson, told CNN Business that the regulatory cloud when it comes to driver classification has been "backburnered" with the California vote.

Prop 22 was designed to side-step a new California law, Assembly Bill 5 or AB-5, which went into effect on January 1 and codifies an "ABC" test to determine if workers are employees who are entitled to labor protections and benefits.

Classifying their drivers as employees has long been viewed as a potential existential threat to Uber, which scaled its business with a massive fleet of workers it treated as independent contractors, shirking the responsibility of costly benefits entitled to employees, such as a minimum wage, overtime, paid sick leave and unemployment insurance.

Uber, Lyft, DoorDash, Instacart and Uber-owned Postmates sunk more than $200 million to fight Prop 22 because had it failed, the company would have had to fundamentally alter its business model.

BTIG analyst Jake Fuller wrote in an investor note Wednesday that if it had failed to pass, it would likely have meant Uber would cut drivers and increase fares to offset the cost of reclassifying drivers as employees. It "would have been a drag" on revenue and earnings, he wrote.

In an industry note ahead of Election Day, Wedbush analysts wrote Monday that not passing Prop 22 "will likely lead to a net-negative financial impact in California, and potentially other states." Wedbush analysts reacted to the vote, saying "this removes a significant overhang and dark cloud for the likes of Uber and Lyft."

Prior to the outcome of the Prop 22 vote, Wall Street "had concerns that other cities and states could follow California on the employee model shift if Prop 22 did not pass," they wrote.

But the passage of Prop 22 gave investors reason to be optimistic about how it could fare when faced with other driver classification challenges in the future.

Prop 22 will grant some benefit concessions, but not the full suite of protections employees would get, such as workers' compensation or unemployment insurance. These concessions are less expensive, which is better for Uber's bottom line in its quest to stop bleeding money. (Opponents say this comes at the expense of some drivers.)

The outcome of the California ballot measure was viewed as bellwether for how Uber and other gig economy companies may navigate regulatory battles in other parts of the country. Uber is currently facing a regulatory battle over worker classification in Massachusetts, for example.

DA Davidson's White said he expects the Prop 22 model which defines a "new class" of workers will be one "the rest of the nation ends up following."

When will Uber turn a profit?


Investors are eager to hear if the company has any updates on its timeline to achieving profitability on an adjusted basis, which it previously projected to investors that it will do by sometime next year.

Last quarter, Uber posted revenue of $2.2 billion, a 29% decline compared to the same period last year. It lost $1.8 billion during the quarter, and a staggering $2.9 billion during the first quarter of this year. In total, Uber lost $8.5 billion in 2019.

With its ride-hail business dwindling due to the virus, Uber's delivery business, Eats, has taken on new importance and became its biggest source of revenue last quarter as people increasingly rely on its service during the pandemic. In July, Uber announced it would acquire one of its competitors in the space,
Postmates, in a bid to bolster its food delivery business.

As CEO Dara Khosrowshahi said at the Wall Street Journal's Tech Live conference last month, Eats is not yet profitable, and the company believes it will reach profitability around the same time as its overall business.

White said he is watching to see if Uber reveals to what extent growth in its delivery business, Eats, is having on the company's overall race to profitability.

Investors are carefully monitoring the business given how competitive the delivery marketplace is - some competitors in the US include DoorDash, and Grubhub - and how businesses compete on driving down prices to win customers.

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