While the release of Lyft’s initial public offering made a lot of headlines, they are just the warm-up act for big brother Uber. The crowd is on the unruly side though, so care must be taken.
If the IPO that Lyft just launched is any indication, the initial ride down stock market street may not be as smooth as Uber would like. It’s not that Uber’s IPO isn’t generating a lot of excitement, but some investors are wondering whether ride-share IPOs, or any IPOs these days, may be all they are cracked up to be.
The real appeal of IPOs is to be able to get in very early in what often turn out to be upward trends for these new stocks, and IPOs are structured to do exactly that, at least the ones that go off well. Not all do though, and like the early days of aircraft, some just don’t get off the ground very far and end up crashing down the runway.
Lyft certainly looks like one of these, and we need to ask whether their disappointing results are a matter of this just being a rather ugly looking company or whether the current lack of apparent appetite for IPOs right now played a role in this.
There’s no question that Lyft’s business problems have played a big role in the reluctance of investors to ride this stock up. It’s not so much that Lyft is bleeding money, it’s when the bleeding will stop that is so concerning. There is hope for this of course, but when we need some fundamental change to how this company does business like being able to roll out fully autonomous cars one day, that should strike at least some fear into the hearts of investors.
Lyft has figured out how to generate revenue, they just haven’t figured out how to make money on this model yet. If this were simply a matter of getting enough revenue in order to overcome the weight of fixed costs and start generating margins, then things would look more promising. We may then be able to just look at growth rates and make some positive projections, but we need to be able to see the light at the end of the tunnel for this to happen.
Uber and Lyft have stepped in and tried to take over a very well-established business, where local companies traditionally offered taxi service to people who needed a ride. The model of these taxi companies are generally profitable ones though, where after all of their expenses they get to keep part of their revenue at the end of the day.
Taking Money from Taxis is One Thing, But You Need to Make Money Doing It
When you get a technology company stepping into this arena, at least as far as the technology end of the business goes, there’s no way that these local operators can compete. There’s also the matter of Uber and Lyft getting around regulations that apply to local operators, and this has been the source of all the complaining that taxi drivers and companies have made, creating a backlash of some magnitude against the so-called ride sharing companies.
Make no mistake though, Uber and Lyft are taxi companies, even though their role is closer to what they say it is, a software platform, than a full-fledged taxi company. They are still very much transportation companies though, at least in practice. This is not really ride-sharing, it is people going into the taxi business and working for these new companies instead of the old- fashioned ones.
The idea of taking the taxi business into the 21st century has served to excite some people though, although we do need to figure out how to make this profitable. Undercutting cab companies is one thing, but if these cab companies are walking away with profits and you are not, we need to wonder who is having the last laugh here.
The hope is that Uber and Lyft will be laughing hardest in the end, but the road there isn’t all that clear. At least with Uber, things aren’t anywhere near as bad, with less red ink being spilled at least. Perhaps investors have less of a tolerance for red ink right now than they normally do, and this may be the case given where the market is now, with at least a fair bit of concern about where we may be headed from here.
IPOs thrive in bull markets and don’t do so well in bear markets or even sideways ones. While the market’s performance thus far in 2019 has been a good one, there are real worries on the horizon and it’s not where we’ve been the last few months, it’s where we’re going during the rest of 2019 that matters.
Uber Turns Down the Price of Its Upcoming IPO
This is therefore a rather tricky time to be rolling out an IPO as large as Uber’s. Uber has at least taken a more cautious approach to this, only looking to release $10 billion worth of its shares, most of which are to be newly minted. The price will be based upon an overall company evaluation of $90 to $100 billion.
The original idea was to base the IPO on the company being worth $120 billion. As a private company, it was valued at $76 billion not long ago, but the idea of going public is to add value through people being willing to factor future value in more, and to also be willing to pay more in order to speculate on this future value.
This number has been adjusted down after watching Lyft sputter, and Pinterest, who are looking to launch their IPO very soon, has done the same, lowering their expectations in the face of a stock market that does not seem to have that big of an appetite for new issues right now.
The goal with pricing an IPO is to not set it so low as to create too much of an imbalance such that the stock gets run up too much, but you do want to see it run up somewhat to create some excitement. When you don’t, you end up with a situation like Lyft, which end up looking like a failure right out of the gate. Had Lyft been priced lower, the situation would at least look different, and perception means a lot here.
Uber only lost $1.8 billion last year, an improvement over the $2.2 billion they lost in 2017, but given that investing means sharing ownership in a company, many investors may wonder why they would want to buy a piece of a company that is losing money like this. We tend to want to turn our eyes away from balance sheets when we get excited about the prospects of a stock, but we don’t want to look away too much either.
For your average investor, who is on the conservative side of the scale, they may not want to take on the additional risk and uncertainty that an IPO such as Uber’s involves. There are some IPOs that are on more solid ground, and some with more question marks, and while there may be less of them with Uber than with Lyft, it may be more prudent to not be overly eager to jump on these moving trains at least until we get a better idea of where they are headed.