Lyft’s IPO May Be Oversubscribed but Investors Are in for a Bumpy Ride

By March 22, 2019 April 3rd, 2019 General
A Lyft car in San Francisco, as Lyft prepares for IPO

After all the anticipation, it’s Lyft that has kickstarted the year of ride-hailing IPOs, much to the enthusiasm of investors. The market has been waiting for the ride-hailing startups to go public for years, perhaps more Uber than its US rival, but that hasn’t stopped Lyft’s listing from being oversubscribed, according to media reports.

And that’s despite Lyft (or Uber, for that matter), not being anywhere near profitability and actually reporting significant losses. Where have we heard this before?

Cast your memory back to March 2017, when Snap Inc, another tech darling, held its own oversubscribed public offering despite iffy financials. People were looking for the next Facebook, and Snap looked like it might be it. 

Three days after listing, Snap’s stock price plunged more than 12 percent and never really reached anywhere near its initial value again.

Obviously, this is comparing apples to automobiles but there are common elements here. For one, both Snap and Lyft are unprofitable tech startups entering the public markets with oversubscribed IPOs.

Also, they are both up against a much more powerful and deep-pocketed incumbent: Facebook proved to be Snap’s ultimate nemesis, while Uber commands a much bigger market share and has a much larger war chest than Lyft.

It’s hard to think market history won’t repeat itself, looking at Lyft’s numbers. It’s enough pressure even without considering the fact that Uber may be after a US$120 billion valuation on NYSE.

Lyfting the Veil

In a comprehensive note on Smartkarma, Insight Provider Douglas Kim asks a question that should be on the mind of every investor looking into Lyft:

“Is US$2-2.5 billion enough for Lyft to last in the next two to three years without concerns about additional secondary offering during this period?”

In his analysis, Kim points out the company will need at least US$2 billion to make ends meet in the next two years. If it manages to raise roughly that much through its IPO, chances are it needs to raise more funds in two or three years. That would potentially mean a secondary share offering, diluting existing shareholders’ stakes.

Lyft revenue, profits and losses, base case scenario

Chart by Douglas Kim

Like several tech hopefuls who believe in super-fast growth, Lyft seems like it will be posting losses for a while yet – Kim’s base case scenario doesn’t expect the ride-hailer to turn a profit before 2025. This increases the possibility of more fundraising in the meantime, with everything that entails for shareholders.

It doesn’t help that Lyft fails to disclose some pretty vital numbers for the analysts to properly evaluate the business. “Without the quarterly active driver numbers and the full picture of the extent of shared rides, one can’t develop an accurate picture of the business,” points out Sumeet Singh of Aequitas Research in a pre-IPO analysis on Smartkarma.

Future Promise

So how can Lyft reduce costs and improve the bottom line? Autonomous cars seem to be a big part of the narrative – after all, much of Lyft’s revenue has to go to the drivers who, well, make ride-hailing services possible. Fewer drivers to pay, more money for the company.

The problem is, truly autonomous cars that will allow Lyft and Uber to do away with drivers altogether still have a ways to go before they take to the streets in large enough numbers.

It’s not just that there isn’t a clear consensus on when full self-driving technology will go mainstream. There is uncertainty in how the technology will be regulated and what it will mean for companies operating fleets of self-driving cars. There is also distrust from the public, not to mention the POTUS himself.

Diversifying the business seems to be a better strategy for Lyft. “Management seems to be aware of the need for business diversification as Lyft has pitched itself as an inter-modal transport network,” says Insight Provider Johannes Salim in a recent piece on Smartkarma. Salim highlights moves like Lyft’s acquisition of bike-sharing provider Motivate as an example.

It remains to be seen whether Lyft will follow Uber into sectors like food delivery to boost revenue – it certainly worked for Uber – or whether it will seek to expand to more markets outside the US and Canada. Unfortunately for Lyft, many markets in Europe and Asia now have their own well-established and well-funded incumbents with their own ambitions for growth.

Ride-hailing companies private valuations - Uber, Lyft, Didi, Grab

Private valuations of ride-hailing companies based on their latest funding rounds

Tech IPO Angst

So is Lyft’s IPO bound to disappoint investors like other tech IPOs before it? Citing data by Jay Ritter from the UF Warrington Faculty at University of Florida, Rohinee Sharma of Investory notes in a brief article on Smartkarma that only 16 percent of the 38 US tech IPOs of 2018 were profitable – a figure that hearkens back to the dotcom bust of 2001.

It’s not uncommon for investors to finance tech companies’ fast growth in hopes of stellar future returns. But it’s trickier to ask public markets to do the same. “Barring very few profitable IPOs marked for this year – AirBnB for example – would the market be subsidising profits for future growth potential?” Sharma asks.

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