Risk of DOL’s Proposal and Reactions of Uber, Lyft, and DoorDash Stocks Exaggerated

The classification of drivers and couriers as contractors was at the forefront again as the Department of Labor, or DOL, proposed rescinding rules created during the Trump presidency and returning primarily to what was in effect before. While the change may increase legal challenges against Uber (UBER), Lyft (LYFT), and DoorDash (DASH), we don’t believe the chances of drivers being classified as employees have changed significantly. First, before the employee classification changes under Trump, those firms continued to successfully classify drivers as contractors. Second, over time, the firms have compromised with several states and increased benefits provided to their contractors, which we think sets precedents and strengthens their current standing if challenged. In addition, we expect the DOL’s latest proposal will muddy worker classification, creating difficulties for courts and lengthening the overall legal process.

The main risk that this proposal presents is the question of price-setting and whether that is under the control of the drivers. In the past, that was not the case as the ride-hailing platforms set the price. However, now, platforms such as Uber are providing more control to drivers. They can view prices before accepting rides and they can provide rides in any areas they desire.

If forced to make changes, we think it is more likely that the reclassification option will be given to the drivers and couriers, and we believe the majority will choose to remain contractors. However, if the firms are forced to significantly increase compensation and benefits, operating expenses are likely to increase by around 30%, which would likely significantly lower the intrinsic values of these firms. However, for the reasons above, we believe the likelihood of such a scenario remains low and we continue to view all three narrow-moat firms’ stocks as attractive.