Lyft IPO: Don’t Believe the Hype

In the near future, American company Lyft will list on the NASDAQ under ticker symbol ‘LYFT’.

It’s shaping up to be one of 2019’s biggest IPOs…and investors are lining up to buy up their slice.

But I think it’s a bad idea…

Here’s why I won’t be buying any LYFT shares:

Business model and competition

If you’re not familiar with Lyft, it’s a direct competitor with Uber…with the most obvious difference being in how it’s marketed. Lyft aims for the younger crowd, while Uber posits itself as a classier, more mature option.

In my anecdotal experience, a Lyft ride might mean lowered windows, aftermarket subwoofers, and disco lights…while Uber might mean water bottles, mints, and jazz on the radio.

But maybe that’s just me…

From a cold hard factual perspective, the two companies are priced about the same…and both apply surge pricing during busy times. I’ve heard from drivers that they pay similarly, but Lyft was first to add the in-app tipping option.

Lots of drivers do both at the same time…accepting rides from whichever app has one first.

In terms of market share, Uber dominates at 69%, while Lyft picks up the crumbs at 28%, even though they claim a much larger portion at 39% in their IPO registration.

You can generally say that it’s a 70/30 split…which will become important in a moment.

Another point to understand is that of their staff — the drivers.

Lyft has 1.4 million of them in its network. These drivers are essentially employees.

And right now, employees ain’t happy.

Gizmodo reports:

Inside the luxury Omni Hotel in downtown San Francisco on Monday morning, Lyft executives and investors wheeled and dealed about the company’s upcoming IPO as the firm’s valuation hit a whopping an estimated $25 billion and climbing.


Outside the Lyft investor meeting, 75 drivers and labor organizers protested falling wages, a lack of pricing transparency, as well as calling for a driver minimum wage.

And according to protestors, their wages have been cut multiple times a year, each year.

That concerns me. As an investor, you don’t necessarily want to see pay cuts…especially multiple pay cuts each year. It implies poor financial managership.

Instead, you want to see pay raises. New hiring. Growth signals.

But that only happens with a fully-functional business…which Lyft is not. Let me explain…

Financials (or lack thereof)

At the moment, Lyft is seeking a US$25 billion valuation at their IPO.

The crazy part is that Lyft doesn’t make money. The company is deep in the red…and going deeper by the year.

  • Net loss in 2016: $683 million
  • Net loss in 2017: $688 million
  • Net loss in 2018: $911 million

That’s almost a billion bucks in the red on an annual basis.

Normally, that sort of blatantly bad news would send investors scurrying…but a ‘unicorn IPO’ simply makes people think they’re buying the next Amazon or Netflix.

But they’re not.

Sorry to disappoint.

Lyft isn’t an innovator. They’re a runner-up. And they’re not making money doing it. In fact, their cash flow is moving in the exact opposite direction you’d want to see from a soon-to-be-listed company.

They’re a limping money pit. And at a $25 billion targeted valuation on just $2.1 billion in revenue, Lyft is an expensive limping money pit.

No wonder they keep cutting driver pay. They can’t afford it!

The story would be different if they were incurring losses to build up the next transportation disruptor of 2019…but they’re not. To my best understanding, their whole phase two centres around Lyft Scooters, a Lime lookalike.

And no big changes to their ride-sharing model as far as I can tell either….

Sorry, Lyft — you’re as late to that party as you were to ride-sharing.

Investor fervour

Okay, so Lyft isn’t offering innovation…nor are they offering profits…nor are they offering a working business model…so what do they have going for them?

Fervour.

Investors are attracted to IPOs like sharks to blood. They can’t resist it. And before long, they work each other up into a frenzy.

Throw in the word ‘unicorn’ and the effect multiplies.

(Unicorn refers to a new tech company valued at over $1 billion dollars…think Facebook or Netflix.)

Then mention that they’re backed by Google (just 5%) and their little beating hearts might explode!

It honestly doesn’t get much better for them.

On top of all that, Uber’s promoting their own IPO at about the $120 billion mark. Remember that Lyft has a 30% market share. If you do the math, that gives Lyft a relative valuation of $51 billion.

Now $25 billion sounds cheap!

But we know that it doesn’t work that way.

We understand that numbers matter — the potential here is weighed down heavily by the risk of owning a terrible business.

Sadly, it won’t stop a mad rush of folks jumping into the IPO with wads of greenbacks in their hands.

You’ll likely see this stock flourish…at least in the onset.

Then as reality sets in…and the novelty loses its lustre…I expect the stock price to drop like a lead weight.

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: If you do choose to put some skin into this game, I’d recommend using a limit order…meaning you’ll only buy shares up to a certain price. Don’t let the market dictate what price you get in at…especially when there’s a good chance for a sharp rise and/or a sharp fall.


Taylor Kee is the lead Editor at Money Morning NZ. With a background in the financial publishing industry, Taylor knows how simple, yet difficult investing can be. He has worked with a range of assets classes, and with some of the world’s most thought-provoking financial writers, including Bill Bonner, Dan Denning, Doug Casey, and more. But he’s found his niche in macroeconomics and the excitement of technology investments. And Taylor is looking forward to the opportunity to share his thoughts on where New Zealand’s economy is going next and the opportunities it presents. Taylor shares these ideas with Money Morning NZ readers each day.


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