When – or Should—You Buy Lyft Shares?

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  • Going public is a sign that a company has a proven and tested concept. While it may not be profitable yet, it plans to be. The process of going public involves filing paperwork for an initial public offering, or IPO.

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  • Ride-share firm Lyft just joined the ranks of publicly-traded companies last week with its IPO, beating out other ride-share company Uber. Initially priced at $72 per share, early trading saw shares rally to over $80, before falling under the IPO price and into the $60 range.

    What happened? All IPOs should ideally price shares high enough that initial investors can get out at a reasonable profit. And so that the company can raise capital from the stock sales to fund its needs for a while. But they also need to be priced low enough to move higher, to create market confidence. If they fall, it’s considered a “failed IPO.”

    That’s not necessarily a bad thing. Facebook shares plunged 30 percent from their IPO price within a few months of going public. While that made the social media giant the poster child for a failed IPO, it also forced the company to think about its shareholders. As a result, it changed a number of practices to improve revenue and profitability—and more than five years later, the company has handily beaten the market since then.

    With Lyft shares looking like a failed IPO, now may be a good time for individual investors to buy in. By doing so, they can pay less than the banking syndicate that paid the IPO price of $72 per share. Of course, all companies are different, and Lyft has a more challenging business structure than Facebook. The company makes its money by high-volume, but low-margin transactions, so investors looking to buy need to consider future profitability, not just price.

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