Uber Stock Faces a Valuation Dilemma If Its Labor Costs Rise
Uber Technologies (NYSE:UBER) could face a valuation crisis if its labor costs begin to spiral up based on a reclassification of its workers’ status. And that means UBER stock may be hit hard if what has recently happened in the U.K. spreads throughout its global workforce.
On March 16, the company announced that it had decided, effective March 17, private-hire drivers using its Mobility platform in the U.K. will be treated as workers. That is a legal designation in the U.K. indicating they are entitled to the minimum wage (generally called the National Living Wage in the U.K.), holiday pay, and, if eligible, a pension.
The designation does not change the fact that these “workers” are still self-employed for tax purposes. It also does not include Uber Eats business. Moreover, this only includes the “engaged” time that the workers have when connected with a customer.
Implications For Its Bottom Line
Moreover, if this change in its operating practice were to spread to the U.S. and other countries the company could face significant labor force cost increases. Uber seems to think that its model won’t change. Its 8-K filing on March 16 said:
“Uber’s UK Mobility business represented about 6.4% of global Mobility Gross Bookings in Q4 2020. Based on current expectations, Uber is not changing its previously announced expectations for Adjusted EBITDA for Q1 or 2021.”
The filing also says that 99% of UK drivers earn more than the National Living Wage, which is “£17 per hour of engaged time in London and £14 per hour of engaged time in the rest of the UK, after expenses.”
Now that management has opened the gates to its U.K. workforce, they will likely face further challenges. For example, the Financial Times quoted a group stating that it would be back in court. They will be seeking further minimum pay guarantees for time spent on the app waiting for requests to come through.
If that goes through, Uber would face significant cost increases. For example, the Financial Times stated that BTIG estimated that Uber’s extra costs would amount to $260 million, or a 2% drag on its operating income.
Uber operates in 71 countries in the world. It has 22,800 employees globally as of Dec. 31, 2020. Of these 12,400 or 54.3% operate in the U.S., according to its recent 10-K (page 19).
Therefore, by extrapolation, we can estimate the costs if these changes occur in the U.S. If its U.K. employees represent 6.4% of bookings, and the U.S. represents 54% of total employee costs, then theoretically the costs could rise 8.44 times.
If the BTIG estimate of $260 million costs applies to the U.K., then an additional $2.193 billion in costs could hit the U.S. if similar changes are made in the U.S. The total hit to the bottom line would be $2.454 annually.
Last year, Uber lost over $4 billion in operating income. With an additional $2.45 billion in costs if these changes hit both the U.S. and the U.K., income would lose 58% more. Moreover, Uber’s free cash flow was negative $3.361 billion last year. This would deepen that negative FCF by 73%.
There is no way that UBER can trade anywhere near its present stock market value of $103.5 billion should the company take another 73% hit in free cash flow. Granted, these changes might take a good number of years to occur.
Moreover, UBER claims that its adjusted “mobility adjusted EBITDA” (earnings before interest, taxes, depreciation, and amortization) is $1.169 billion. That is great, but its total adjusted EBITDA is already negative at -$2.528 billion (see page 54 of its 10-K). Even if only half of the $2.454 costs hit the bottom line from increased employee costs, adjusted EBITDA would fall. This cost increase could be 48.5% (i.e, $1.227 billion in costs divided by $2.528 billion in adj. EBITDA).
What To Do With UBER stock
Given the crack in the dam in the U.K., so to speak, watch out for UBER stock to take a hit if it spreads. If there is any indication that these changes will seep over to the U.S. workforce, Uber cannot continue to trade at its present lofty valuation.
Analysts still think the company will be profitable on a net income basis by 2022, trading today at 222 times earnings. By 2024 the company is forecast to make $2.10 per share. This gives UBER stock a four-year forward P/E of 26.5 times based on Monday’s closing price of $55.69.
The only problem with this scenario is that if the company’s costs were to increase anywhere from 30% to 50% based on the changes in the U.K., the valuation is too high.
Look for the market to begin to anticipate elements of these costs increases should the company have to make similar changes in the U.S. That will have a depressing effect on UBER stock.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.