LYFT's IPO Has Implications For Other Unicorns, But Not What You Might Think

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A week or so after the Lyft (LYFT) IPO, the popular narrative seems to be that trading has been a bit of a flop, and this has negative implications for other so-called “unicorns” that are scheduled to go public later this year. The problem with that analysis is that it doesn't quite mesh with reality, and the implications for upcoming IPOs may be different from conventional wisdom.

When a company offers shares to the public, the success of the offering to them is not really tied to what happens to the stock in the weeks that follow. The short-term success is measured by the level of pre-IPO demand for shares at the offering price, while the long-term success is only measurable after a year or two as a public company, or at the very least once a couple of earnings reports have been released.

What happens in between may not suit some over-enthusiastic traders, but it doesn’t reflect on the company, nor the investment bankers who advised them in the run-up to the offering.

The job of those bankers is to maximize the returns to the company from the IPO. That is done by drumming up demand, then pricing the shares at the highest possible point while reflecting that demand. From that perspective, Lyft’s launch was a huge success. They priced the shares just above the top end of earlier estimates, resulting in a valuation of $21 billion, yet the initial offering was still over-subscribed.

There was even enough residual demand to ensure that the shares initially traded higher, enabling those looking for a quick profit to take one if they chose.

As those same investment bankers start to consider pricing for Uber, Pinterest, and other tech unicorns yet to debut, the lesson from all of that is likely to be that growth is still valued.

One could argue that because LYFT is now below that $72 mark, it will temper enthusiasm for those future offerings, but history would argue against you. That pattern is not unusual in high-profile IPOs and has little or no bearing on either the long-term future of that stock, nor enthusiasm for upcoming listings.

So, if the focus is on growth, what does that mean for the two big unicorns that look to be next in line, Uber and Pinterest?

There are questions about the growth of both, but in both cases, there are also answers to those questions.

Pinterest saw user growth slow as other social media platforms attacked its format head on, but having survived that, is expected to return to decent user growth soon. There is also lots of room for improvement in the revenue-per-user metrics. Pinterest is currently behind Twitter (TWTR) on that basis, but with them and Facebook (FB) having shown the way to improve monetization, Pinterest has the benefit of a clear road-map. That is why the first pre-IPO analyst's call is bullish.

Uber is still growing quickly, but the knock on them is that the rate of growth has apparently slowed a bit recently. That is likely down to two things. First, there is increased competition in the space, not just from Lyft, but also from a whole host of smaller, regional companies around the world. That will inevitably slow growth, but the fact that they are still growing shows the benefit of being the first and best-known in a market.

Second, the law of large numbers (in a stock analysis sense) comes into play. Simple logic dictates that it is far easier to achieve, say, forty percent growth on a small number than on a large one. The flip side of that though is that smaller percentage increases in large user numbers result in big increases in overall revenue.

There are essentially two types of investor in an IPO, those looking to make a quick buck and those that see long-term potential in the stock. The Lyft offering allowed for the first, and the jury is still out on the second, so those saying that the current price of the stock will have a negative impact on what is to come for Lyft and other unicorn IPOs are mistaken.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , IPOs , Investing Ideas , Technology , Venture Capital
Referenced Symbols: LYFT

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