Queue the bear raid
The early action in Lyft is reminding folks of a basic lesson when it comes to investing in seemingly can’t miss, newly public companies: Do your own research on IPOs, stay clear of the initial Wall Street hype and be prepared for volatility. And in the case of Lyft, be prepared for early losses.
Lyft shares plunged about 12% to $68.01 on Monday following a spate of selling into the close on the company’s IPO day on Friday. The ride-hailing stock’s first trade on Friday was $87.24.
After Lyft didn’t finish at the highs of the session on its first day of trading (usually not a healthy near-term signal to traders), it appears Wall Street has spent the weekend digging under the hood again. It’s not like Lyft is a bad company, it’s that the road to profits is several years away at best. In other words, Lyft’s business model is unproven.
That may have many people who got into the name on pure hype on Friday reassessing.
“We understand the excitement around LYFT given a large total addressable market (TAM) and low penetration, positioning along the front lines of a shift in how we think about transportation and, of course, strong top line growth. That said, we simply have to look too far out with too many big assumptions in order to make a case for the stock. Key issues include limited visibility on the path to profitability, sustainability of revenue growth, scale of investments in bikes, scooters and self-driving cars, and valuation,” says Guggenheim analyst Jake Fuller.
Fuller initiated coverage of Lyft with a Neutral rating, but no price target. That’s pretty telling.
Lyft needs a path to profitability
If Lyft doesn’t solve one serious issue that will probably make its initial financial reports valuable lessons on calculating losses, then one of the hottest IPOs in some time could hit dud status within a year (not unlike Snapchat).
The main issue here: Lyft has not proven that it has a clear path to profitability.
While Lyft saw sales more than double to $2.2 billion in 2018, it lost about $911 million. That’s despite Lyft’s bookings surging 76% year-over-year to $8 billion.
In fact, Lyft’s losses have worsened in recent years. Lyft’s operating losses tallied $977.8 million in 2018, up from $708.3 million in 2017 as it picked up the pace of incentives to drivers and riders.
It could be time for Lyft’s founders to plan out an investor day so it could restore confidence and regain the narrative.
A Lyft spokeswoman didn’t return a request to make co-founders Logan Green or John Zimmer available for interviews.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi