Chris Helgren (Reuters)
This morning, the executives at Lyft (LYFT) began their tour around the major companies of Wall Street, looking for investors in their upcoming IPO. I have, in the past, laid out a case here as to why IPOs, and high-profile IPOs in particular, can be a minefield for individual investors.
Very often, the publicity creates a degree of interest that results in excessive demand, sometimes almost regardless of value at the launch, that results in an initial surge in price to unsustainable levels. It is then better to wait for the pullback from the initial highs before jumping in, but for several reasons, Lyft may be a different story.
Ignoring for now what followed after these companies went public: the “jump and drop” pattern following an initial offering has held true in most well-publicized initial tech offerings, from Facebook (FB), through Twitter (TWTR) and Snap (SNAP), with a whole host in between.
There are, however, two big differences with Lyft; the potential of the company and the current attitude of institutional investors.
From a potential perspective, the LYFT launch is in many ways more like that of Facebook than any that has come since. Lyft, like Facebook, is the first company to go public in what is a truly disruptive industry. At the time of their IPO, there were a lot of questions about Facebook: How would they monetize their popularity? Could they prevail against a host of competitors? How could they justify such a huge valuation?
People were wary of the concept after witnessing the rapid rise and even more rapid demise of MySpace, and Facebook was already in a battle for supremacy in the social media space with Twitter.
Still, the doubts were there and after reaching $45 on its first day of trading, FB fell to $17.55 over the next few months. Obviously, even after the recent problems, it was the drop, not the initial surge that was the mistake, and investors are all too aware of that.
From a competitive perspective too, now is an ideal time for LYFT’s IPO. The problems that have beset their big rival Uber are being addressed and will probably fade from the public consciousness soon, but their presence now may limit, or even eliminate, the post-IPO dip that has been so typical in the past.
That is why those who are saying that Lyft is overvalued at or around the proposed $62-68 offering price are missing the point. You can argue that is the case based on a normal multiple of revenue, but this is not a normal industry. The pace of acceptance of ride-sharing as a concept has been so rapid that it is hard to estimate the potential total market but, as with social media, the likelihood is that what estimates there are will turn out to be way too low.
The other thing that has changed is the attitude of institutional investors to losses in a disruptive company like Lyft. Amazon (AMZN) changed the game in that regard, and it is only relatively recently that they have shown what can happen when the switch is turned on. Every trade or investment involves a risk/reward calculation and AMZN’s recent profitability has skewed the reward side of that equation to such an extent that in some cases big losses are no longer as scary as they were just a few years ago.
A full analysis of the value of the LYFT stock at issuance is, of course, impossible right now as we don’t know what the offering price will be. What we can do though, even at this stage, is assess the potential for long-term growth and the likely attitude of the market to the stock. On both of those fronts, LYFT looks at this early stage to be a winner.
If you have an opportunity to participate at the offer price, therefore, it makes sense to do so, but unlike in several recent cases, doing that in order to bank a quick profit may not be the best strategy.