Lyft IPO: Get Ready For A Bumpy Ride

Yves here. The Lyft IPO comes as a Lyft driver committed suicide. From the Independent Drivers’ Guild:

Statement from the Independent Drivers Guild on Lyft driver suicide, one of at least nine drivers to take their lives in a little over a year in NYC:

App companies are making investors rich by holding down wages to the point where drivers are killing themselves. Even now as Lyft prepares to go public with a $23 billion valuation, the company is in court fighting minimum wage for drivers. It is shameful and it must be stopped. It’s time for Lyft to drop the lawsuit and treat drivers fairly. Our condolences to the driver’s family and loved ones.

By Michael Scott, a news editor for Safehaven.com and Oilprice.com. Originally published at Safehaven.com

Massive-valuation, loss-making startups are all the rage now, and the next IPO to make waves is going to be in the ride-hailing segment, where Lyft is set to go public before rival Uber. In fact, Lyft is listing on Thursday on Nasdaq as LYFT and will be the first hoorah of 2019’s much-anticipated IPOs.

Uber will follow suit in the first week of April, and Pinterest and Airbnb are most likely to be next on this year’s IPO list.

And while many might be asking if the market is right for these startups to go public, it’s really a moot point. After all, investor appetite is already soaring for startups that are generating huge losses, so the risk is already priced in.

Or, as DataTrek, Research co-founder Nick Colas told CNBC’s Trading Nation today: “These companies are all remarkably unprofitable. Lyft lost $900 million-plus last year, and all of these are cyclical companies, as well, unproven by an economic downturn.”

Other than the $900 million (and change) that Lyft lost last year, what else do investors need to know ahead of the IPO?

For starters, this is shaping up to be one of the biggest IPO in the past 10 years, based on valuation.

Last week, Lyft was suggesting a valuation of nearly $23 billion. But what everyone needs to know is that Lyft has already sold all of its planned pre-IPO shares. So when it lists on Thursday, the price target is probably going to be higher.

Of course, Uber will be watching this high demand for its rival closely.

What could derail LYFT, which currently has secured almost 40 percent of the US ride-share market and gave 18.6 million people at least one ride in the fourth quarter of 2018, according to the New York Times Deal Book?

The growth has been clear. In 2016, it had 22 percent of the market.

But part of that growth has been because of discounted rides in preparation for the IPO, which its executives have been quick to warn investors about, saying “We believe that much of the growth in our rider base and the number of drivers on our platform is attributable to our paid marketing initiatives.”

And where the massive losses come into play in the growth equation is in the fact that Lyft, unlike global Uber, operations only in North America. So how much more can it grow?

The co-founders of Lyft told investors last week essentially that it will be a while before Lyft becomes profitable, though they are sure it will, eventually. The problem is that in order to compete in North America with Uber, it’s got to offer discounts and spend an awful lot on marketing.

It will become profitable, they say, but they’re also going to be investing so profits are going to have a wait.

For Lyft investors, it will have to be a long-term game, if they have the patience.

Some analysts are all in for this ride; others say it’s going to start off well and then investors will become nervous.

As quoted by the Financial Times, Triton Research co-founder Rett Wallace said “[Lyft] will move up the price and it will go like gangbusters initially and then we will have the first-quarter earnings and the disillusionment will set in.”

When Uber follows suit with its IPO, the pressure will really be on.

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24 comments

  1. Savita

    a loss of 900 billion last year!
    well all of us here at NC are nursing our schadenfraude – meaning, we can only keep our fingers crossed. bad news for Lyft means bad news for Uber.

    Reply
  2. The Rev Kev

    I have always believed in the maxim that it is not a profit until it goes into the bank. That has not happened here nor is it likely too. The only thing that has been keeping the whole shebang going has been a whole stream of investors that included General Motors, the Ontario Teachers’ Pension Fund, Alibaba, Prince Alwaleed’s Kingdom Holdings Company, Alphabet and a host of others. I guess that all these investors are hoping for a big IPO to collect back the money they invested before they lose the lot.
    Reading about this company, I have tried to go to a font of wisdom on business matters to help guide me. In short, I went to the Ferengi Rules of Acquisition and there it all was. Pushing their drivers/employees to the edge so that some of them actually committed suicide? Yeah, that is Rule 211 as in “Employees are the rungs on the ladder of success. Don’t hesitate to step on them.” Sounds about right. And a major reason why I despise companies like Lyft and Uber.
    Looking around, I am seeing (https://www.forbes.com/sites/greatspeculations/2018/10/10/a-closer-look-at-lyfts-valuation/#23f2cc614a97) claims of increasing number of rides, increased annual unique riders, increased number of rides per rider, increased total number of rides per year and increased gross revenue per year but it just never somehow translates as cash flow enough to keep the company self standing. Lots of claims but the numbers are not there. This too is covered by the Ferengi as in Rule 153 – “Sell the sizzle, not the steak.” That is the trouble with numbers. They are sharp things and when you try to juggle them you are liable to cut yourself. Finally I will take a wild guess. With both Uber and Lyft going for their IPOs, there was a race to be the first as after that, the appetite for such ventures would have decreased sharply afterwards. And Lyft is going first, off into an unknown future. Maybe they can get there faster using Uber.

    Reply
      1. PlutoniumKun

        There is something about Ontario – OMERS (the Ontario Municipal Employees Retirement System) is one of the major funders for the horrible Hudson Yards development in NY, discussed in links yesterday. Although it seems likely that they’ll clean up thanks to the generosity of the NY taxpayer via Mayor Bloomberg.

        Reply
    1. Ed

      Lyft (and Uber) can’t make money with more rides and more riders and more average rides because every ride is subsidized at a loss. It’s really that simple.

      Think to yourself: why didn’t everyone take taxis everywhere 10 years ago? Surely the smart phone didn’t make the taxi business suddenly make sense in urban areas. No, 10 years ago I didn’t taxi to work because Taxis are twice as expensive per mile than Uber and Lyft. And Taxi drivers don’t make much money. Uber and Lyft are so cheap because they subsidize every ride with investor dollars.

      If Uber and Lyft truly charged what the ride costs, it would be too expensive to use them so often. Right now Uber and Lyft are in a game of chicken; in order to be profitable they have to raise prices by 2x, but the first one to do so cedes marketshare to the other. There’s no brand loyalty in this at all (just like there’s no brand loyalty in gas stations or real taxi companies).

      Reply
  3. Thuto

    “Lyft IPO is oversubscribed”: Proof-positive that even pigs with thickly laid on lipstick have their admirers.

    Reply
  4. John A

    So, basically, all the wide boys are piling in to stag the shares before the first quarter figures come in?

    Reply
    1. JohnnySacks

      Bingo! Pump and dump on an epic scale, it’s the dot com boom all over again, only this time on steroids laced with meth. But nice money if you can be part the bilking rubes game. Can anyone remind me again why capital gains deserve preferential tax treatment compared to W2 labor?

      Reply
  5. vlade

    What I don’t entirely get is why someone who’s on approx $2/day under extreme stress still keeps doing it? To be very clear, it’s not to blame them and say “they can quit if they don’t like it” – I don’t know if they can quit or not – contractually.

    Sure, they have non-Lyft/Uber etc. debts and liabilities, but is it really so better to do sometihng at this level when it means you don’t even have time/will/energy to look for anything else (assuming there’s something else, hell, even stuffing Amazon warehouses for some time might be better than this, at least it pays minimum wage – I guess).

    Reply
    1. Larry

      As part of the drivers strike/protests yesterday drivers were interviewed about their working conditions. Essentially many drivers are in a debt trap once they acquire a car, and wage cuts hurt them dramatically. Many of the hardest working drivers appear to be immigrants with low opportunities for other work. The drivers very clearly are stuck and are starting to push back as the pay becomes unlivable.

      https://gizmodo.com/lyft-drivers-protest-falling-wages-as-execs-drum-up-inv-1833543529

      Reply
  6. cnchal

    > . . . After all, investor appetite is already soaring for startups that are generating huge losses, so the risk is already priced in.

    Where are the eclownomists and their rational market hypotheses now?

    Reply
  7. chuck roast

    I got a Fidelity New Issue Offering last week for equity participation in LYFT @ $62 – $68 share. I passed.

    Reply
  8. Lee

    Someone who should know, is not impressed by Lyft and Uber, and says so on a nationally broadcast TV program.

    KATHLEEN SMITH, PRINCIPAL AND CO-FOUNDER, RENAISSANCE CAPITAL: Thank you.

    HERERA: And you say it`s going to be tricky to make money in either one of

    these companies. Why?

    SMITH: Well, they`re both losing money for every hundred-dollar ride.

    Lyft is losing $6 per ride, and Uber is lose — sorry, Uber is losing $6

    and Lyft is losing $12. So they`re both money-losing companies. That

    should be a red alert for investors looking at these businesses.

    GRIFFETH: If we had to pin you down, I mean, Uber is clearly the pioneer

    and much larger of the two companies. Does that give it an advantage that

    would be more attractive for investors, or do you go with the upstart Lyft?

    I mean, which way do you go here, if you had to pick one?

    SMITH: If I had to pick one, I`d go with the dominant market leader, even

    though we have to give Lyft some credit for being faster growing and

    gaining in market share. But Uber is really the giant company, and

    generally the giant companies tend to be the better call if you`re going to

    make call it — better protection and a sizable firm.

    HERERA: And we`re just looking at some of the points you sent us. You say

    this should be part of a well-diversified portfolio because there may be

    some volatility and because of the financials, which you just discussed.

    SMITH: The way we would approach it is unless you`re able to get shares on

    an IPO, the best thing, especially for companies like these, which are

    growth companies and growing at all costs, would be to put them into a

    portfolio of other companies so that you can at least have some other

    diversified risks. There`s still risk. So, that would be the approach

    we`d take. That`s why we have put together an IPO ETF, that`s a basket of

    60 or so newly public companies, and you`ll moderate your risk that way.

    GRIFFETH: Now, Lyft is going to have two different classes of stock. Here

    we go again. You know, this has happened with other technology giants as

    well. And this ideally is to give the founders more control over their

    company. Does that — should that give investors pause before they decide

    to buy this stock, do you think?

    SMITH: It`s not favorable to have a company that limits the shareholders`

    right to vote. That`s not favorable. I think it`s a negative. I don`t

    think it will stop the deal from happening. But to have the founders who

    own really less than 5 percent of this company control about 50 percent of

    the vote, it`s not right. If things go wrong, public shareholders have a

    right to make changes and to have their vote represented equal to their

    shares.

    HERERA: On that note, Kathleen Smith with Renaissance Capital. Kathleen,

    thank you.

    http://nbr.com/2019/03/18/nightly-business-report-march-18-2019-2/

    Reply
  9. Knute Rife

    I was there for the Dot Com Boom and Bomb, and here we go again. Jaded as I am, though, those burn rates are still stunning.

    Reply
  10. Ahmed Vats Hod

    The buyers lining up to to take this garbage ie who are they?

    I suspect insiders helping their high net worth VC clients cut & run by dumping a spread into mutuals holding mum & dad retirement funds.

    Isn’t this the tactic of criminal banks?

    Such might absorb Lyft but surely not Uber as it would/ could send Wall St into freefall.

    Any fund mgr dumping clients into this worthless trash should surely be exposing themselves to criminal charges?

    Reply

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