Gig-economy stocks tracked lower in August as investors grew nervous over what impact the passing of a Californian labor bill that would classify many gig-economy workers as employees rather than independent contractors might have. The legislation, known as the Assembly Bill 5 (AB5), which passed through the liberal-leaning state's Senate Tuesday, may require companies that rely on flexible labor and minimal worker costs to pay Social Security and employment benefits while complying with federal and state regulations on minimum wages and working conditions.
Offering some concession, California Governor Gavin Newsom said that he would continue an open dialog with leading gig-economy companies regarding a possible exemption deal. "These remain ongoing negotiations, and regardless of what happens with AB5, I am committed, at least, to continuing those negotiations," Newsom told The Wall Street Journal.
From a technical standpoint, gig-economy stocks have rallied from last month's lows, indicating that share prices have fully factored in the passage of AB5. Traders who foresee further gains should consider these three stocks that dominate the space. Let's take a closer look at how the controversial bill may affect each company and run through possible trading tactics to employ.
Uber Technologies, Inc. (UBER)
San Francisco-based Uber Technologies, Inc. (UBER) develops technology applications that enable independent providers of ridesharing and meal delivery services to transact with end users. The company, which sees about 17% of rides hail from The Golden State, believes the bill doesn't specifically require it to reclassify its drivers from independent contractors to employees because they aren't core to its business. A key aspect of determining whether someone is a contractor or employee requires a company to prove that contractors are doing work "outside the usual course" of its business, according to Uber's chief legal counsel Tony West, per CNBC. Uber stock has a market capitalization of $58.77 billion and is trading down almost 20% over the past three months as of Sept. 13, 2019.
Following an initial dip after going public on May 10, the ridesharing company's stock moved higher for the next month and a half to set an all-time high at $47.08 on June 28. However, the price turned sharply lower during August as investors grew cautious over the bill's impact. Since setting a low at $30.66 on Sept. 3, the price has staged a modest recovery and is now trading above a short-term downtrend line. Also, the moving average convergence divergence (MACD) line recently crossed above its signal line to generate a buy signal. Traders who go long on the stock should look for a test of $39, where price finds resistance from a horizontal line and the 50-day simple moving average (SMA). Consider placing a stop-loss order below the Sept. 10 low at $31.65.
Lyft, Inc. (LYFT)
Lyft, Inc. (LYFT) operates a peer-to-peer marketplace for on-demand ridesharing in the United States and Canada through a multi-modal platform that provides riders with personalized access to various transportation options. Also headquartered in San Francisco, the company has about 24% of its rides come from California. After the bill passed, Lyft spokesman Adrian Durbin said that the company is "fully prepared to take this issue" to voters, per Barron's. "Our state's political leadership missed an important opportunity to support the overwhelming majority of rideshare drivers who want a thoughtful solution that balances flexibility with an earnings standard and benefits," Durbin said. As of Sept. 13, 2019, Lyft stock, with a market value of $14.1 billion, has also slipped about 20% over the past three months.
Apart from a countertrend rally between May and July, Lyft shares haven't given shareholders much to cheer about, with the stock trading down 46% from its debut $87.24 opening price on Mar. 29. This week, the stock has rebounded slightly to push above a trendline connecting price action back to late August. The relative strength index (RSI) sits just above oversold territory, giving the stock ample room to move higher and make a run toward overhead resistance at the $55 level. Traders should consider implementing risk management by positioning a stop underneath this month's low at $43.41.
Grubhub Inc. (GRUB)
Grubhub Inc. (GRUB) provides an online and mobile platform for restaurant pick-up and delivery orders in the United States, connecting roughly 105,000 local restaurants with diners. The $6.35 billion food delivery company has remained conspicuously silent about the AB5 bill, prompting some market commentators to speculate that Grubhub sees the legislation as a way to flush out some of its competitors. It's currently the only profitable major gig delivery company – reporting earnings per share (EPS) of 27 cents in the second quarter on revenue of $325 million. Despite turning a quarterly profit, Grubhub stock has declined 4.06% over the past three months and is down 12.64% year to date as of Sept. 13, 2019.
Grubhub shares fluctuated within a roughly $25 trading range from January through late July. The stock fell away in August but has recovered this month to trade back within the range, suggesting that the push lower may have been a head fake trade to trap short sellers. Those who buy at current levels should look for price to return toward the trading range's top trendline near $85 and limit downside with a stop placed just below crucial support at $60.