Trading the Uber and Lyft IPOs

Normally, individual investors have difficulty getting to hot IPOs. An IPO is an initial public offering. It’s when a company sells stock to the public. Sometimes, demand for the stock exceeds supply and that creates a hot IPO which is one that many investors wish they could buy into.

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  • Among the hot IPOs expected this year are offerings from the ride share companies Uber and Lyft. Uber could be worth more than $120 billion, according to experts, while Lyft could trade with a value of about $25 billon.

    But many of the gains will go to company insiders and early investors. When Uber and Lyft go public this year, The New York Times reported that “their founders, top executives and investors are set to reap billions of dollars in new wealth.

    But one group that helped build up the ride-hailing companies will miss out on most of the rewards: their drivers.

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    That’s because while Uber’s and Lyft’s full-time employees and investors own company stock that they can convert into cash after the initial public offerings, the millions of drivers who ferry passengers around for the services are independent contractors.

    That has made them ineligible for stock grants — and bystanders to the coming I.P.O. bonanza.

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  • Now Uber and Lyft, facing the growing inequity between its stockholders and its drivers, are pursuing measures to address the gap.

    Both intend to set up programs to give cash to some drivers, enabling them to buy company stock at the time of the I.P.O., according to two people who have been briefed on the plans. The drivers can also keep the cash as a bonus, said the people, who declined to be named because they were not authorized to speak publicly.

    The programs will not give drivers a major share of Uber’s and Lyft’s stock. Lyft plans to give $1,000 each to drivers who have completed 10,000 rides for the service; those who have done 20,000 rides will receive $10,000, one of the people said.

    Uber is still mulling its cash program and payout amounts, but they will also be tiered, another person said.”

    Individual investors who aren’t drivers will need to assess the IPOs as potential invetsments.

    Lyft Could Be First

    Lyft Inc., which according to Bloomberg, got its start as a college carpooling service called Zimride in 2007, is ready to hit the on-ramp to an initial public offering ahead of larger rival Uber Technologies Inc.

    The smaller of the two biggest U.S. ride-hailing companies is expected to publicly submit its IPO application to regulators as soon as [March 1]. That will put the company ahead of Uber as well as several high-profile tech unicorns bound for IPOs this year.

    Lyft announced on Dec. 6 that it had privately filed with the Securities and Exchange Commission, the same day that Uber filed confidentially, people familiar with the matter have said.

    Valued at $15.1 billion on the private markets in its last funding round, Lyft is aiming for an IPO valuation of $20 billion to $25 billion, a person familiar with the matter has said.

    While limited financial information on Lyft has been reported, its filing will include the first release of its full-year numbers, as well as other key metrics that the San Francisco-based startup hopes will entice potential public market investors.

    Details on the number of shares to be offered and the intended price range likely won’t come until a later filing.

    Lyft generated $563 million in revenue in the third quarter, up from $300 million in the same period a year earlier, a person familiar with the matter said in October. Losses increased to $254 million in the period from $195 million in 2017, the person said.

    Potential investors could blanch at those losses, which have continued even though Lyft operates almost exclusively in the U.S., which is often seen as a key profit center. It also doesn’t have a massive, growing food-delivery business like Uber.

    Lyft could begin its roadshow — in which it will meet and pitch investors — the week of March 18 and begin trading on the Nasdaq soon afterward, a person familiar with the matter has said.”

    Risk factors will garner attention, too. Investors will be looking for any insight on potential regulatory hold-ups as well as legislation that could require Lyft to classify its drivers as employees.

    The company’s governance structure is also likely to come under scrutiny. This month, the Wall Street Journal reported that Lyft’s founders were preparing to take near-majority voting control, despite together owning less than 10 percent of the company.

    The voting rights would give John Zimmer and Logan Green a firm handle on the company when it comes to major decisions, including over board appointments and a potential sale.

    In 2017, Snap Inc.’s co-founders retained about 90 percent of the voting rights, selling shares without those rights in the company’s IPO. Snap’s stock has plummeted about 42 percent from the offering.”

    Past Performance Clues

    There will be hype associated with the IPOs. To wade through that, it can be useful to look beyond the first day of trading and consider how recent IPOs have done. There have been 157 offerings in the past twelve months. The top 5 are shown below.

    top 5 IPOs

    Source: IPOSCOOP.com

    The bottom 5 are shown in the next chart.

    bottom 5 IPOs

    Source: IPOSCOOP.com

    Fifteen (9.6%) have delivered triple digit gains while 74 (47%) have lost money. Long term studies display the same trends. Few IPOs deliver for investors.

    However, many investors will say, “this is Uber” or “this is Lyft” and they can’t miss. Well, the same could be said of SNAP which is showing a large loss since its IPO or even Twitter which is below its 2013 IPO price, more than five years later.

    Facebook took 15 months to get back to its IPO price after an initial selloff. That is a common pattern and indicates it could be best to wait for a better opportunity.

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