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.
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.”
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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.