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Jeff Reeves’s Strength in Numbers: Why Lyft, Uber and other ‘gig economy’ stocks are in trouble now

Signs of economic slowdown spook ‘risk-off’ investors, writes Jeff Reeves. Read More...

The “gig economy” is again in focus with another flashy IPO on the horizon. This time it’s Fiverr, an Israeli-based startup that recently filed to go public under the ticker FVRR and hopes to raise as much as $100 million.

The specific details for Fiverr is that it’s a freelance services marketplace with roughly 3 million users at present. It was initially founded on the idea of folks buying and selling work for a fixed fee of $5 — thus the clever name. Services now cover everything from logo design to translation services to custom animations.

Yet the general idea of Fiverr is the same as it ever was with these kind of companies — a middle-man platform for the self-employed, with no meaningful profits but a big story about how valuable it may be in the long run.

It’s a tempting story, particularly as unicorns such as Uber Technologies UBER, +1.53%   enter public markets and offer a direct investment in the growing trend of side gigs. Based on a 2018 Gallup poll that found more than one-third of all Americans have a side job, the “gig economy” it’s certainly a serious movement worth watching.

But there are emerging signs this megatrend isn’t going so well. Beyond a series of battles around worker protections and what gig economy employers must legally offer their employees — sorry, “independent contractors” — the bottom line for investors is that there simply isn’t much bottom line to speak of for most of these companies. That goes for both corporate earnings as well as tangible returns on investment in these stocks.

Here are five prime examples of gig economy stocks that have failed to live up to expectations — and why they may continue to suffer in 2019.

1. Lyft

Unless you’ve been living under a rock, you know that the recent IPO of ride-sharing icon Lyft Inc. LYFT, +5.09%   did not quite go according to plan. Lyft priced its IPO at $72 a share and the stock’s first print was at $87.33 on March 29, but a mere 10 trading sessions later it was under $60 a share and has more recently settled in the mid-$50s.

What gives? Well, investors were disappointed as Lyft showed wanton disregard for costs, with a $1.1 billion first-quarter loss. It blamed a price war with rival Uber, and claimed this will be its “peak loss” year, but there are reasons to be skeptical that a theoretical path to profitability can still justify even the current valuation.

After all, Lyft is roughly one-fourth the size of Uber both in terms of market value and annual revenue, so which company logically more likely to win a price war with a cash burn like that?

2. Uber

Let’s not pretend that Uber is in the clear just because it’s a bit bigger. It’s particularly noteworthy that in its first post-IPO earnings report — which featured a $1 billion loss — Uber declined to offer full-year revenue or EBIDTA guidance.

Even if that doesn’t make you shy away from Uber, as one analyst wrote after the May report, “business complexity, lack of visibility into forward numbers, and a precarious competitive landscape are likely to keep shares range bound.” That sums it up pretty well.

Bigger picture, the lack of disclosure is a pretty terrible sign from a company that has had a ton of time to prepare for its entry into public markets and assuage Wall Street’s concerns. It is not unreasonable to expect more transparency from a company with aggressive international expansion plans, self-professed potential in its Uber Eats food delivery, and expensive R&D into automated driving technology all going on. Investors simply aren’t interested in buying Uber blindly and crossing their fingers — particularly as the market seems to be going “risk off” in recent days.

3. Dropbox

As one of the leading cloud storage solutions firms, Dropbox, Inc. DBX, +0.80%   is a mainstay of small businesses and self-employed contractors. Whether you’re doing desktop publishing, wedding photos, or freelance copywriting, Dropbox is the go-to place for collaboration and file sharing.

Like other stocks on this list, the problem isn’t with the service itself. Instead, it’s the perpetual downward spiral for prices as cloud memory costs remain incredibly cheap across providers. So while Dropbox’s top line continues to grow briskly, as evidenced by the 22% revenue growth in its May earnings report, the company is still operating at a loss — unless you employ clever Silicon Valley accounting with “adjusted profits” that magic away the shortfall. And despite this growth, it’s still small potatoes compared with behemoths like Alphabet Inc. GOOGL, -1.33%   with its Google Drive and Docs services.

Even worse than fierce fight for customers and no hope of material profits anytime soon are the Dropbox stock charts. Shares have steadily declined 25% in the last year, and are struggling to hold the line on Dropbox’s 2018 offer price of $21 a share. If the stock breaks below that mark, look out below.

4. Upwork

Another big name when it comes to collaboration is Upwork Inc. UPWK, -0.40%  , a platform for connecting freelancers and contractors with customers. Upwork deals with the messier parts of finding actual gigs in the gig economy, managing the bidding process and contracts as well as a secure platform for payments — all in exchange for a small fee, of course.

The problem is that the financials simply don’t support the narrative of big potential. Despite ostensibly operating in a fast-growing marketplace for freelancers and the promise of a virtuous “network effect” as more folks join, earnings have disappointed; in May, Upwork posted brisk revenue growth year-over-year but fell short of lofty expectations on both its marketplace revenue and gross services volume. If these are numbers in a healthy economy at full employment, when businesses are eager to spend, what will happen when times get tough and these projects are the first to get cut from the budget?

Read: May stock-market selloff marks key monthly reversal that ‘presages deeper declines’, technician says

Momentum is clearly to the downside on Upwork, too. Shares were offered at $15 in late 2018, and the stock currently trades slightly below that mark after flopping 40% from a short-lived peak of $25 a share earlier this year.

5. ANGI Homeservices

The parent of Homeadvisor, ANGI Homeservices Inc. ANGI, +1.62%  , made a big move in 2017 when it announced it would acquire rival Angie’s List and become the dominant operator of home improvement portals. On these sites and others in the ANGI network, homeowners find help with projects and contractors search for new business.

Unfortunately, the reality is that this combined company trades at roughly $14 a share, not much above the $13 IPO price of Angie’s List back in 2011.

Lest you argue the recent mashup may give this older gig-economy stock a second wind, note that shares have crashed 40% from their recent 52-week high as profits remain relatively small despite steady top-line growth.

These comments on profits or performance are common complaints, but more important to ANGI’s future outlook is that this weakness comes as the U.S. housing market is slowing. Home prices are barely rising at all, with the Case-Shiller 20-city index posting its weakest gains this March in almost seven years — despite an economy at full employment and mortgage rates at historic lows. That does not bode well at all for related contractor gigs, or the near-term growth prospects of ANGI stock.

Jeff Reeves writes about investing for MarketWatch. He holds no investments in any companies mentioned in this article.

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