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Lyft: It Keeps Getting Worse

Sep. 11, 2019 7:06 PM ETLyft, Inc. (LYFT)DASH, UBER30 Comments


  • California continues to move forward on AB 5 that will turn contractors into employees.
  • Lyft already has a slim profit margin.
  • Avoid the stock until the company formulates a business model around generating solid operating margins.

My previous work already focused on the lack of a margin of safety in Lyft (NASDAQ:LYFT) and the news continues to get worse. The company faces legislative issues pressuring the gig work concept while the business growth is apparently decelerating at a very fast clip. The stock doesn't appear to have reached a low yet.

California Problem

The biggest problem with the ride-sharing model is that the main companies have yet to solve the probability picture. Neither Lyft or Uber (UBER) have figured out how to make money on a model that improves the transportation of consumers around the globe.

Image source: Lyft website

The ride-sharing model requires heavy technology and sales/marketing spending to attract riders and drivers. The better transportation service offered by these companies are still capped on pricing due to traditional transportation models such as public transportation, taxis and car ownership.

While Lyft has all of these problems turning a good concept into a great business model, the California State Assembly recently passed AB 5, essentially moving ride-sharing drivers from contract workers to employees.

The law establishes three criteria for employers to use to identify a worker as an independent contractor:

  • Must be free from the employer’s “control and direction” in carrying out duties.
  • Must perform a job outside the employer’s usual line of work.
  • Must regularly do the same type of work as will be done for the employer.

The biggest test that Uber and Lyft drivers fail is the second test of performing a job out the employer's usual line of work. The other two tests probably have some leeway for argument.

Uber was clear on how the changes would impact the business and drivers via a recent blog post on Medium. The company suggests fewer drivers and more control over employees including a

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