A few months ago, I wrote an article about Jim Chanos (Trades, Portfolio)’s short position against Grubhub (GRUB). His thesis was pretty straightforward: he believes that the restaurant industry is too low-margin as it is, and the introduction of additional middlemen is unlikely to be a profitable business model. He also pointed out that Grubhub’s business model doesn’t scale, as food delivery drivers are time-limited in the amount of deliveries they can make.
This logic underlies a broader theme in Chanos’s thinking - that the gig economy business model in general has an expiration date. In a podcast interview with Real Vision, the veteran short seller discussed the problems that he thinks this industry has.
A vanishing source of efficiency
The main source of efficiency in the gig economy is the labelling of gig workers as independent contractors, rather than employees:
“The gig economy business model is dependent on labour and regulatory arbitrage, wherein the drivers [in the case of Uber, Lyft or Grubhub] are treated as independent contractors, not employees. This is not only a bookkeeping piece of efficiency, it’s also a tax and regulatory source of efficiency, as Social Security and Medicare taxes, and any state unemployment taxes are now 100% the obligation of the driver, whereas typically a company would pay half of Social Security, Medicare and all of the unemployment.”
Chanos went on to point out that in many cases, gig workers are unaware that they are on the hook for these taxes, which can run as high as 20% of wages. When you add in the costs of buying and maintaining a car, as well as the cost of gas, many of these contractors end up making not much more than minimum wage, and sometimes not even that.
The reason this is significant is that there are growing calls for authorities - both in the USA and in other countries - to introduce legislation that would force companies like Uber (UBER, Financial) and Lyft (LYFT, Financial) to treat these workers as employees. Such measures have already been introduced in California, as well as the United Kingdom. These businesses are already unprofitable, even with the existing labour arbitrage, so what happens when they are forced to pay unemployment and healthcare taxes?
The basic idea behind these companies is that revenue growth is the most important metric for investors, and so far this has served them well enough. Management teams like to use metrics like 'monthly active users' or exotic earnings figures like WeWork's infamous 'community-adjusted Ebitda' to try to distract from the underlying reality. But as real losses continue to mount, it’s fair to wonder whether there will come a point soon when investors begin to re-evaluate this logic.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Carl Icahn: How Companies Use Buybacks to Increase Stock Price
- The US Federal Reserve Turns to Buying Individual Bonds
- Carl Icahn Reflects on His Early Experience of Losing Money
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