Markets

Lyft Stock Won't Be a Broken IPO Forever

It's easy to bash Lyft (NASDAQ: LYFT) as an investment these days. The country's second-largest ride-sharing service went public last week at $72, and after trading as high as $88.60 shortly after the open, it has closed below its IPO price in each of the past three trading days.

Lyft is now a broken IPO, and bears are relishing the stock's shift into reverse after the initial hoopla. The losses are jaw-dropping as a result of the heavy promotional activity at Lyft as it tries to close the wide gap with Uber through aggressive pricing, and that's rarely the blueprint for a sustainable business model. Things are pretty hairy right now for Lyft's investors, but a stock's fate is never sealed after just its first four trading days. Monday morning likely wasn't the last time Lyft stock would do a pull-up over the $72 price bar.

A Lyft driver laughing with a smiling rider

Image source: Lyft.

Cracking open the hood 

The pessimism is pretty thick out there. When Seaport Securities slapped a $42 price target on the shares earlier this week, the bearishness went unquestioned. Analyst Michael Ward isn't convinced that the addressable market will be as large as Lyft and industry bulls believe. Millennials and future generations aren't likely to abandon auto ownership, and the valuation for a distant silver medallist seems out of whack. 

When reports on Wednesday surfaced about Carl Icahn selling his 2.7% stake in Lyft at the IPO price, the knee-jerk market reaction was that he dodged a bullet. The legendary billionaire investor nails another trade. Really? 

Momentum is not on Lyft's side at the moment, but let's tap the brakes before taking the exit ramp to Beartown. Seaport's Ward may suggest that the worst is yet to come, with his $42 price target suggesting another 40% of downside from current levels, but there are Wall Street pros at the other end of the spectrum. The current Street high is $97, suggesting an equally tantalizing nearly 40% of upside from today's startling line.

There will be more bullish nods in the coming weeks as the underwriters that helped take Lyft public start to chime in. They sold some of their Lyft shares at $72 late last week, so as long as the IPO remains below that point, it's fair to say they will chime in as bullish. Financial giants will also want to make sure Lyft isn't a failure, especially if they want the juicier Uber IPO to go off without a hitch later this year. Uber's not hitting the market at a $120 billion valuation if Lyft can't stay above $20 billion in a few months.

Uber may be much larger -- generating more than five times Lyft's revenue -- but it's also growing a lot slower. Lyft's revenue more than doubled last year, and this is before following Uber's international push or entering the restaurant delivery niche.

It's hard to overlook Lyft's $911.3 million in red ink last year. Aggressive pricing for riders and keeping drivers happy find the second-largest player in this niche bleeding as it takes on Uber. However, isn't that the only way to stand out at this point? There's a reason most of the country doesn't know the name of the third-largest player in this growing field. 

Lyft shares will be volatile. Every quarterly report is going to come with an audible warning for investors to buckle their seatbelts. However, the real shock here is if it doesn't get back up over $72 in the coming weeks or months. There are too many forces that will push the stock higher when it's below water. The IPO may be broken now, but the stock and the industry are not. 

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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

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