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Lyft Paves the Way for Tech IPO Surge

Daniel Laboe

Lyft is expected to have its initial public offering (IPO) this week making it the first of the ride-hailing companies to open up ownership to the public. The real milestone is the 52 week deficit that Lyft is showing on its income statement in their S-1 filing. The business is posting a loss exceeding $911 million for 2018 making it the largest deficit for any company going into an IPO. This will really tests investors’ appetite for risky investments considering, “Many of their business models have not been tested fully,” according to Stanford business School professor Ilya Strebulaev.

Revenue growth has been close to exponential for Lyft with the top line growing over 200% in 2017 and growing another 100% in 2018. The cost of scaling the business is what caused the enormous losses to the bottom line. The insurance costs associated with the increased riders as well as payment processing fees have taken some of the most substantial chunks out of profits. Sales and marketing, which are essential to any fast-growing enterprise, also ate a large portion of income. Lyft’s plan is to scale up until their profit scales eventually tip.

The problem with this plan is the intense competition in this space. Lyft is far from a monopoly. Just in the city of Chicago, I have 3 ride-hailing options to choose from - Uber, Via, and Lyft - and you better believe that I check all three of the prices before making a decision on which service to use. This intensely competitive pricing could cause diminishing margins or even predatory pricing by the company that can afford to take the largest losses. Ride-hailing is no doubt the future of transportation, but choosing the right price to invest at is more ambiguous.

There have been some other recent IPOs where the company posted substantial losses in the 52 weeks prior and the stock ended unfavorably for initial investors. Snap Inc.SNAP is one example of this, posting a loss exceeding $500 million going into their IPO in March of 2017, and the stock has traded down 56% since (SNAP vs. Tech Sector below).

 

 

Groupon GRPN had their IPO in late 2011 revealing to potential investors a close to $500 million deficit on their income statement. Since their initial public offering in November of 2011, the stock has fallen 87% (GRPN vs. Tech Sector below)

 

 

The main issue surrounding these types of IPOs is that it is challenging to assess an accurate price for a company that hasn’t shown a positive bottom-line especially when the losses shown are so significant. The assumptions involved in coming up with a fair value are incredibly ambiguous and typically not overly conservative. Investors also tend to be overzealous with these trendy stocks and jump in at any price not evaluating the company’s ability to turn a profit.

The IPO market is red hot for tech right not with IPOs from Airbnb, Slack, Uber, and Pinterest being the most prominent names. Lyft’s IPO this week will set the tone for Uber’s IPO which is announced to happen early April. The Uber IPO is expected to be the biggest of the year with an anticipated valuation of $120 Billion. A hot IPO market is good news for the broader market indicating positive market sentiment and an appetite for risk.

For all of you potential Lyft investors, I would advise you to be cautious when looking to buy this IPO. Investment bankers involved are indicating a strong demand for this IPO which should tell retail investors to be extra careful. The stock will likely spike in the short term from oversubscription then adjust back down to a reasonable value. My suggestion is to let the dust settle before jumping into Lyft.

 

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