Lyft finally got its IPO off the ground last Friday, but it’s been sputtering since. It’s not so much that it has dropped almost 20% in 3 trading days, it’s more about when the bleeding will stop.
IPOs get issued with a lot of hope and promise, and investors are usually very eager to get a piece of the action and even see the opportunity to get in on the ground floor at a ground floor price as a real perk. Brokers distribute IPO shares like treats to their best clients, who are usually quite appreciative and this builds their loyalty.
The ground floor that recent IPO Lyft started out looks more like a ceiling than a floor though, not just because it’s dropped since that point, but also from the reaction of several analysts who do not share in the enthusiasm that IPO buyers generally have.
Lyft’s birth into the world of publicly traded stocks started out with some real promise, at least at the point of delivery. It opened at $85.43 a share, up $13.43 from its issue price of $72. If you got in on this and only paid $72, you had a little time to take your profits at least, but not much.
Pre-market demand for in IPO often drives up its open price over the issue price by a fair amount, even though placing an order to buy any stock before the open and especially before the first open ever is a questionable move, and those who did so are already feeling the pain of this mistake. If the stock does take off, you can always get in then once you see how the market feels about it, but waiting avoids paying too much and then getting caught in a sell-off.
By the end of Lyft’s first trading day last Friday, we were already seeing signs of some real weakening, where we gave back about half of this premium over the issue price already. Those who wanted to profit from the premium they received by buying it at $72 did have to act fairly fast, and many may not have imagined that the right thing to do would be to sell it as soon as possible, but so far that would have been the best move.
By the time it opened on Monday, when it gapped down below $70, the damage was done, and there was no taking profits now, only losses.
Even if your outlook with this stock extends for years into the future, perhaps when no one drives cars anymore and hopefully many migrate over to ride-sharing instead of owning their own vehicles, there just isn’t any good reason to ride the roller coaster down while we’re waiting for the market to more accurately price in their future outlook.
In a situation like this, when an IPO starts out looking like a real dog, the most sensible thing to do is to wait for all the barking to end at least. There’s quite a bit of that going on right now, with price targets as low as in the 40’s, and if you start out in the 80’s and drop to the 60’s in just a couple of trading days, and the expectation is that you’re probably going much lower, that’s not very exciting.
We also know that plenty of people got off this bus, some with profits, some with losses already, even though their present losses may pale in comparison to what might come. This is not to sa that Lyft may actually go down all the way to the $42 that Michael Ward of Seaport Global is projecting, but there does appear to be a risk of that, and some significant risks overall with this investment at this point.
IPOs Need More Upside than Normal Stocks, Not Less
IPOs are considerably riskier than your normal stock at the best of times, but investors are often prepared to take on this extra risk for the greater upside that these stocks tend to have. When the upside vanishes, all you have left is the risk, and what is to be decided isn’t how much you might make but how much you will probably lose.
Perhaps Lyft realizes its potential like some think it might, perhaps we do have completely autonomous vehicles in a few years which require paying no driver because there isn’t one, and perhaps a lot of people will choose this over their own cars, but for this to happen anytime soon appears to be very unlikely.
New and more innovative companies are often valued higher than they would be otherwise due to their future promise, but this all depends on how much progress can be made over what period of time, with a lot and soon being what the market is after.
Lyft’s revenues may be taking off, but this only helps if they make more money, not lose more money. It’s the latter that is happening now and Lyft is expected to lose $1.2 billion dollars in 2019. Do we really want to be investing in a company that is losing that much money right now?
Some are advising for investors to steer clear of this stock at least until they become profitable. There are some cases where the future expectations are near enough and good enough that we may want to give them a lot of room, but Lyft ever making money isn’t even a foregone conclusion, and the when of this appears to be several years away at best.
If you spend more than you take in, expanding this won’t help unless there are economies of scale involved, and the nature of Lyft’s business doesn’t provide much of a benefit here. With them, they are gaining more rides and losing money essentially on each one, so even more isn’t the solution. This only works well when you are actually making money on them.
If Driverless Cars Are Needed to Save Lyft, That Should Scare Us
We’ve made a lot of progress in working to make driverless cars a reality, but there are still some real bugs to work out. If every car was driverless, this would actually be a lot simpler, as the cars could all communicate with each other and it would be simpler to allow them to move us safely and efficiently from one point to another.
One of the biggest problems with implementing this is that there are humans involved, both drivers and pedestrians, along with a present infrastructure that is designed to cater to them and not robot cars. Getting to the point where we will see very many driverless cars on the road, especially ones that are used as taxis, is actually further off than we probably think, including some analysts it would seem.
If and when this happens, these new cars will be expensive, and the main claim to fame of ride-sharing companies like this is that they don’t have to maintain their own fleets, but with driverless cars, they will. This would require huge upfront capital costs, and we need to ask where this money is going to come from.
For those who think that driverless cars will be the savior of Lyft, and even required to save them, making the company profitable finally, even if they can raise the money for this, they are going to be putting themselves in an even bigger hole that will take even more time to get out of.
There’s also the matter of the need for a lot more people to give up their cars in favor of something like this, for Lyft to achieve its potential, which just doesn’t fit the culture very well. It actually may never fit it, when we take into account the sheer convenience of driving your own ride versus having to essentially call a taxi. We have had taxis on the road for a long time now, and while Lyft may be a superior option, it just isn’t that much superior.
Ride sharing is a niche market really, just like taxis are, and does have its place, but not on the scale that some people are dreaming about. The family car is king and it will take a great deal indeed to take its crown away or even put much of a dent in it.
This is just not a good situation at all for the company or its investors. When you see people recommending that investors steer well clear of an IPO right out of the gate, or give them a sell rating right off the bat, from analysts that are not normally anywhere this pessimistic, this is a really bad sign, and this advice should be well-heeded.
For now, the stock is hovering around $70, having dropped as low as $66.90 around noon on Tuesday, and has at least stabilized more over the rest of the trading day. If people are looking for this to pop up, the fizz may already be all out of the bottle, and we could see some significant pain over the next while if we are hanging on and hoping here.
This simply looks like a terrible play from every angle right now, on the long side at least. If the price gets beat down enough and the prospects for the company improve a lot, it might be worth a look. That day seems to be pretty far away right now.