What We Can Learn From Lyft

On Friday morning, Lyft (Nasdaq: LYFT) officially became the first member of Silicon Valley’s sharing economy companies to begin trading on the public markets.

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  • Investors were enthusiastic about the company. Initially, the ride hailing service planned to sell shares between $62 and $68. That was the price referenced in the initial regulatory filings. After making that filing, the company began its roadshow.

    The Process Built Excitement

    A roadshow is defined by Investopedia as “a series of presentations made in various locations leading up to an initial public offering (IPO). The roadshow is a sales pitch to potential investors by the underwriting firm and executive management team of the company about to go public.

    A roadshow involves members of the investment firm who are underwriting or issuing the IPO whereby they travel around the country presenting the investment opportunity. The goal of the roadshow is to generate excitement and interest surrounding the company and its IPO. A successful road show is often critical to the success of the IPO.

    The underwriters travel to introduce the IPO to institutional investors, analysts, fund managers of mutual funds and hedge funds to interest them in the security. The road show also provides an opportunity for the underwriters to introduce the company’s management and for investors to hear management’s vision and goals for the company.

    Most road shows stop include stops in Boston, Chicago, Los Angeles, and New York City. (These are cities where a large number of institutional investors work.)

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  • Roadshow events may attract hundreds of prospective buyers interested in learning more about the offering. The events may include multimedia presentations and question-and-answer sessions with several of the company’s officers present.

    Many companies take advantage of the internet and post videos of the roadshow presentations online. In addition to the larger roadshow events, companies may also hold smaller, private meetings in the months and weeks leading up to the IPO.”

    By most accounts, Lyft’s roadshow was a success. According to CNBC, at one meeting,

    “The room was “jam-packed,” according to multiple attendees. One banker estimated as many as 400 people showed up. Anthony Kontoleon, global head of equity syndicate at Credit Suisse, kicked off the meeting, which lasted roughly an hour.

    There was also an “overflow” room with about 80 people who watched the presentation from television screens.

    Multiple attendees praised Lyft’s management team, which includes CEO Logan Green, President John Zimmer Roberts and CFO Brian Roberts. On attendee said Roberts seemed “personable.”

    “They have a deep bench,” Gabelli research analyst Shawn Kim said. “There’s a lot of talented people.”

    Trading Unleashes Excitement

    After the roadshow, the company priced its shares at $72, valuing the company at more than $24 billion. The pricing indicates that traders are excited about the offering even though the fundamentals might appear daunting to a value investor.

    CNBC reported, “the company faces formidable competition from Uber, according to its S-1 filing released earlier this month. Lyft claimed 39 percent of the U.S. market at the end 2018, up 17 percentage points over two years, it said in the filing.

    In 2018, Lyft reported:

    • Net loss: $911 million, wider by 32 percent from 2017
    • Revenue: $2.2 billion, double the revenue it saw in 2017
    • Bookings: $8.1 billion, an increase of 76 percent from 2017

    Funded early on by venture firms including Floodgate, K9 Ventures, Mayfield Fund, and Peter Thiel’s Founders Fund, Lyft is one of several maturing tech start-ups expected to go public this year.

    Others expected to go public in 2019 include Uber, Pinterest, Zoom and Slack. (Uber, Lyft’s chief rival, is expected to release its S-1 and go public next month.)

    Founded by CEO Logan Green and President John Zimmer in 2007, Lyft launched its ride-hailing app in 2012. In its earlier years, Lyft operated a service called Zimride that focused on long-distance, shared car rides and car-sharing programs on college campuses.”

    Being first to market seemed to carry a possible advantage and Lyft began trading at $87.24, more than 20% higher than the price the shares were offered at. It’s important to remember the initial shares went to large investors and they profited quickly by selling. Buying at the open may not be the best idea for investors.

    In the case of LYFT, the stock price quickly reversed course.

    LYFT stock chart

    Source: Yahoo

    This performance might be indicative of further declines for the company. The history of tech stocks after IPOs is not promising as the chart below shows.

    first year return for global technology

    Source: The Wall Street Journal

    Valuation is a concern for Lyft, and that is a possible conformation of the level of excitement associated with the company’s IPO. The Wall Street Journal noted, “the companies that are planning to list this year will likely have a much higher offer price relative to sales than the average IPO of recent years.

    A higher price-to-sales ratio is a sign of investor enthusiasm and can be used to gauge the value of companies that have yet to turn a profit.

    Below is a chart that shows the price-to-sales ratio on the first day of trading of companies that have gone public before 2019, and of Lyft and Uber. In the past decade, tech companies have entered the public sector with an average price-to-sales ratio of 3.7.

    Lyft and Uber may have ratios nearly three times as high, based on information disclosed in their initial IPO registration documents—though not as high as some well-known tech giants.”

    price-to-sales ratios

    Source: The Wall Street Journal

    It could be best for investors to ignore the first day of trading and think about the longer term. The next chart confirms that big first day gains are not a sign that the stock will be a winner in the long run.

    IPO data

    Source: The Wall Street Journal

    On average, IPOs generate excitement, trade above their offering price on the first day and then under-perform in the long run. This time might be different, and LYFT could deliver above average gains.

    But early investors are cashing out in the IPO and large investors given IPO shares sold many of those shares. It could be best to avoid the stock until it delivers earnings in the distant future.




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