It’s a major year for the Initial Public Offering (IPO) market, as several major companies are slated to begin trading at some point this year. After the IPO of Lyft, Inc. (NASDAQ: LYFT) on Friday, March 29, 2019, the company joins Levi Strauss & Co. (NYSE: LEVI) in the public markets.
Among the other highly-anticipated companies set to complete their IPO in 2019, include Uber, Airbnb, Postmates, Pinterest, Slack, Palantir, and more.
The Lyft IPO was technically priced at $72, but due to the oversubscription and heavy demand, the stock eventually opened trading at $87.24 on Friday. The ride-sharing company would see its newly-trading stock hit an intraday high of $88.60 before sinking into the close at $78.29. Technically speaking, Lyft shares did close up 8.74% from its official IPO price of $72, but the price action was not very encouraging for its first day. The IPO also gives Lyft a valuation of $24.3 billion (more than the 17 other IPOs during the first quarter combined), yet the company lost $978 million in 2018.
Lyft, Uber Profitability Concerns Could Rapidly Increase As CA Assembly Bill 5 Gains Steam
One of the key concerns and issues that are voiced by some investors relate to the valuation placed on some of these technology “unicorns” that are losing millions to billions of dollars a year. Lyft, Uber, Postmates, and others have the brand recognition and growth, but the lofty valuations and rapid cash-burn can be tough to stomach.
Another major problem for these companies is the fact that they largely rely on independent contractors rather than employees to conduct deliveries and ride-sharing. Classifying drivers as contractors saves companies like Lyft and Uber a lot of money. Unfortunately, a new bill has been introduced in California that would force companies to reclassify independent contractors as employees.
California Assembly Bill 5 was authored by Assemblywoman Lorena Gonzalez (D-San Diego), who just recently released the language of the proposed legislation last week. The proposed changes would require newly-classified employees to receive payment for overtime, work benefits, Social Security/Medicare taxes, workers’ compensation, unemployment and more. According to the LA Times, the proposed changes would add roughly 30% to labor costs.
“Am I concerned about the stock price of Uber and Lyft? No. It doesn’t keep me up at night,” stated Assemblywoman Lorena Gonzalez (D-San Diego).
While the state will implement some exemptions to the bill, services like Lyft and Uber will not be included according to state lawmakers. The move comes in the wake of the major California Supreme Court ruling in April 2018 that ruled against Dynamex Operations West, in favor of the drivers who were “disputing the company’s move to reclassify them as contractors and force them to use their own vehicles,” according to the LA Times. It just so happens that this is a similar business model utilized by companies like Uber, Lyft, Postmates, GrubHub, DoorDash, Amazon.com, Inc. (NASDAQ: AMZN) and more.
Proposed Law Could Have Major Impacts Beyond Just The “Gig Economy”
It’s not just Uber, Lyft and other “gig economy” companies that could face the impact from CA Assembly Bill 5, other industries that rely on contracts are slated to get hit as well. Industries like trucking, construction, janitorial services, home health care, newspapers, and even strippers could be caught in the crossfire. These industries have constantly faced lawsuits and criticism from contractors over the years who feel they are not being fully compensated for their work.
While the California bill could undergo changes in the months ahead, as of right now only four exemptions exist currently: doctors, insurance agents, financial advisors and “direct sellers.” The reason these occupations have faced early exemption is due to the fact that they are “already regulated by other statutes,” according to the LA Times.
Overall, the IPO market continues to move ahead with heavy anticipation. However, with valuations already lofty and profitability a concern, a major regulatory shift could be a major blow to the red-hot IPO market and several tech unicorns. Time will tell whether or not lobbying by the likes of Uber and Lyft will be able to yield exemptions, but prospective investors should keep an eye on this emerging threat.