Lyft (NASDAQ: LYFT) was one of last week's biggest losers. Shares of the country's second most popular car-sharing service plummeted 19.5%, a rough road in just its second full week on the market.
The week started off on a sour note. Reports surfaced that Lyft is threatening to sue Morgan Stanley, accusing the investment banking giant of marketing short-selling trades to early Lyft investors who are unable to sell their shares due to lock-up restrictions. HSBC then followed later in the week, initiating coverage with a neutral hold rating despite the stock already trading below its $72 initial public offering price. The final dagger came when industry leader Uber filed its latest financials ahead of its own upcoming IPO.
Image source: Lyft.
There has been a lot of shorting of Lyft. When a company hits the market with a valuation north of $20 billion -- at roughly 10 times trailing revenue and having posted a gargantuan deficit of more than $911 million last year -- it's going to be inviting to naysayers.
No one is going to stop someone from betting against a stock that he or she feels is overvalued, but Lyft's shot at Morgan Stanley is that it's helping its pre-IPO investors circumvent lock-up expirations by allowing them to short the stock now to lock up their earlier gains. Morgan Stanley denies the allegations, but we'll have to see how that plays out. It's just a bad look for a company in just its second week of trading to be pointing the finger at anyone in the underwriting industry.
Wall Street is lukewarm
We have yet to see Lyft's IPO underwriters check in with their official ratings on the stock, but the recent moves by Wall Street pros with less of a bias haven't been kind. Masha Kahn at HSBC initiated coverage of Lyft with a hold rating and a $60 price target on Wednesday. Kahn feels that pricing needs to drop dramatically for ride-hailing services to take over most transportation needs, and it's a bad sign that Uber and Lyft are losing so much money even at current trip rates.
Kahn is also concerned that distant silver medalists scale at a lower margin that the market leaders, and Lyft is certainly well behind Uber at this point. She feels that Lyft deserves to be priced at a discount to Uber.
Here comes Uber
The final piece of last week's pessimistic news trio was Uber giving investors a closer look at its financials. Uber's S-1 filing on Thursday confirmed just how large it is relative to Lyft. It may be growing slower -- revenue rose 42% in 2018 while Lyft's top line more than doubled -- but Uber is also generating more than five times as much revenue. The company recorded nearly $11.3 billion on its top line. Not surprisingly, Uber also has five times as many users. Did you know that Morgan Stanley is the lead underwriter for Uber's offering?
However, Uber's bottom line is also problematic. The company's operating loss topped $3 billion, and that diminishes hopes that Lyft will turn the corner anytime soon. If Uber's struggling to turn a profit with a more diversified model and greater sales, we may never get to the point where the ride-sharing industry gets out of the red. The deep dive into Uber's business shows that the industry is going to be challenging for even the market leader. Lyft will struggle even if it manages to catch up in Uber's rearview mirror.
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