- Is the Lyft IPO Overpriced?
- Lyft Has No Unique Value Proposition
- The IPO Is An Exit For Strategic Investors
- Empirical Evidence
- Labour Issues
- Authorship/Referencing – About the Author(s)
- The Smart Way To Play The Hottest IPO Market In Years
- There Was Way Too Much Hype Around Snowflake’s IPO
- Investing Isn’t Just About The Stocks You Buy
- The IPO Market Rewards Patient Investors
- Overpriced tech IPOs sell grand visions but aren’t worth their valuations
- Vision and growth
- Pay attention to cash burn
Is the Lyft IPO Overpriced?
Lyft is one of the most famous tech unicorns in the world. There was tremendous amount of buzz in the market regarding the Lyft IPO. This is the reason that the company has been able to garner a valuation of close to $24 billion.
This astronomical valuation is despite the fact that the company has announced that it recorded a loss of over $900 million in the last year. Lyft has never ever recorded a profit in its history. During 2018, the company generated a negative cash flow of $350 million.
These facts have not stopped hordes of investors who are queuing up to buy shares of Lyft hoping that it will be the next Apple or Microsoft.
Since the financials of Lyft are pretty unimpressive when viewed from a traditional standpoint, many critics don’t agree to this standpoint. In fact, they believe quite the opposite. They believe that the Lyft IPO is horribly overvalued. In this article, we will have a look at some of the arguments which support the notion that Lyft is overpriced.
Lyft Has No Unique Value Proposition
Many investors believe that Lyft is overpriced because the company does not have any unique value proposition. There is literally no difference between the service it provides and Uber does. Hence, over the long run, there is no reason why customers would be loyal to Lyft.
The problem with the lack of competitive differentiation is that it leads to price wars. In case of companies Uber and Lyft, they are already in the middle of a price war. Both companies are losing money because of a lack of pricing power.
It is unly that this situation will change anytime in the near future. Hence, the negative cash flows may not be transient.
Rather, they may be a permanent feature of this company which is what makes it a bad bet for the value conscious investors.
Conservative investors do not see any way in which the company will be able to turn around this situation. Hence, they believe that the game will last only as long as the finding keeps coming. They don’t want to be the people left holding the bad when the music stops!
The IPO Is An Exit For Strategic Investors
Naïve retail investors are buying into the hype that investment bankers are creating. Many investors really believe that they are getting in on the ground floor of a major tech company. They believe that Lyft will turn out to be the next Apple or Microsoft and the value of their investments will skyrocket.
However, nothing could be farther from the truth. The reality is that most retail investors are not getting in on the ground floor. Instead, they are an exit option for the investors that actually got in on the ground floor.
There is a lot of difference in the way in which companies Apple and Microsoft grew and the way in which Lyft is growing. Apple and Microsoft had to list very early in order to raise capital.
Most investors had not heard the name of these companies when they listed on the exchange. However, Lyft is already a very popular company.
It has not listed on the exchange because until now it has already raised huge sums of money from the very well developed venture capital market.
Hence, the venture capital investors are the people who actually got in on the ground floor. The investors who are buying Lyft shares now are providing an exit route to these strategic investors. When it comes to investing, the rule is pretty simple. “If it is famous, it’s probably not a hidden gem.”
Investors who are hung up on the Microsoft or the Apple story suffer from hindsight bias. This means that they look in the rear view mirror and believe that Microsoft and Apple were easy to spot. The reality is that these were not the only tech companies that listed during the time. There are many others life Pets.
com which did not make any money for the investors. eBay and Amazon were considered to be two of the hottest tech start-ups of their time. Both of them were considered to be equals. However, now about 15 years later, Amazon is at least ten times the size of eBay.
The reality is that there is very little information which would have enabled an investor to differentiate between an Amazon and an eBay.
The record of empirical evidence is crystal clear. Tech companies are also other companies. This means that they also face the same odds of failure. Hence, it would be fair to say that the odds are stacked against Lyft.
Both Uber and Lyft use a legal loophole which allows them to list drivers as contractors and not as employees. This loophole helps these companies save a lot of money as they do not have to pay benefits or even minimum wage to the drivers.
This leaves a handful of investors and employees to split $24 billion whereas the thousands of drivers that these companies have are marginalized. This is unly to go on for long. It is only a matter of time before regulators around the world take serious note of this irregularity and enforce labour laws.
If this happens, the company’s business model will become unviable overnight.
The bottom line is that investors are not really sure whether companies Lyft and Uber are unviable businesses. Some believe that these companies have so much funding that they only think about the long term and ignore near term cash burn. This debate is ly to continue for some time and the share price of Lyft shares will be the best barometer to gauge which group of investors is winning.
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Authorship/Referencing – About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
The Smart Way To Play The Hottest IPO Market In Years
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The biggest software IPO is officially in the books. Two weeks ago, in one of the most hyped events of the year, Snowflake (SNOW) went public.
Snowflake is a data warehousing company. It helps companies better access and make sense of their data. We’ve been “stalking” Snowflake for over a year. And yet, we held off from recommending it to our readers.
There’s nothing wrong with Snowflake’s business. In fact, it’s a phenomenal company. Its customers include some of the world’s most cutting-edge companies, including Adobe (ADBE), Square (SQ), DocuSign (DOCU), and Overstock.com (OSTK).
Not only that, Snowflake is one of the world’s fastest-growing businesses. Its sales have surged an incredible 174% over the past year. That’s faster than Zoom Video (ZM) was growing before it went public.
And Snowflake has barely scratched the surface of its potential. In fact, the global cloud storage market is growing at 22% per year. By 2025, it’s poised to be a $137 billion industry. The cloud analytics market, on the other hand, is poised to be worth $72 billion by 2026.
In short, Snowflake’s growth potential is staggering. So, why didn’t we jump on this opportunity?
There Was Way Too Much Hype Around Snowflake’s IPO
Big, hyped IPOs usually don’t deliver. Last year, Uber (UBER) and Lyft (LYFT) disappointed investors. Both stocks crashed 35%+ during their first six months of trading.
Even ’s () IPO was a flop. It plunged 54% in its first five months as a publicly traded company before ultimately bottoming out. This happens all the time in the IPO market.
When there’s a ton of hype around an IPO, that enthusiasm gets “priced in.” And most of the upside is captured before retail investors us even have a chance to buy it.
In the case of Snowflake, its shares were originally priced between $75 and $85. A few days later, Snowflake bumped its price range up to $120. That’s 50% higher than where it was originally priced! As if that weren’t crazy enough, Snowflake opened its IPO day at over $250 per share. Its shares later hit $319, four times its original IPO price.
At its peak, Snowflake was worth $80 billion on the day of its IPO. That’s more than 431 companies in the S&P 500 are worth.
Investing Isn’t Just About The Stocks You Buy
The price you pay for that stock is just as important, if not more so. Of course, Snowflake isn’t the only high profile “unicorn” that has recently IPO’d. A flurry of tech companies have gone public in the past week.
Dev ops platform JFrog (FROG) also went public last Tuesday. The next day, cloud log management company Sumo Logic (SUMO) and telemedicine company Amwell (AMWL) IPO’d. And on Friday, 3D gaming company Unity Software (U) made its debut.
And that’s just a taste of what’s to come. Data mining company Palantir (PLTR), workforce collaboration company Asana (ASANA), and home-sharing giant Airbnb (AIRB) are also gearing up to go public.
We haven’t seen an IPO pipeline this since 2016–2017. During that time, a number of exciting IPOs went public. Software giant Twilio (TWLO) IPO’d in June 2016. It has since 10X’d in value.
Source: Thomson Reuters
A few months later, The Trade Desk (TTD) went public. It has soared more than 1,600% since September 2016.
Source: Thomson Reuters
Cloud computing company Coupa Software (COUP) went public in October 2016. It has also surged nearly 1,000% since its IPO.
Source: Thomson Reuters
Data analytics company Alteryx (AYX) is another top-tier software company. It went public in March 2017 and has soared nearly 1,100% since.
Source: Thomson Reuters
Cybersecurity company Okta (OKTA) IPO’d in October 2017. And it’s also been a high-flyer, surging nearly 900% since its IPO.
Source: Thomson Reuters
Then in October 2017, MongoDB (MDB) went public. It skyrocketed more than 700% over the next three years.
Source: Thomson Reuters
These are incredible gains. And I believe the recent crop of tech IPOs could deliver similar gains in the years to come. But that doesn’t mean you should blindly buy them.
The IPO Market Rewards Patient Investors
Sure, some IPOs storm the gate… delivering big gains to investors who bought in on Day 1. But most hyped-up IPOs follow a predictable pattern.
They decline shortly after going public. In other words, you’re usually been better off waiting to buy IPOs. In fact, every single IPO I mentioned from the 2016–2017 IPO boom eventually went “on sale,” meaning you could have picked up shares below their IPO closing price.
For instance, you could have bought The Trade Desk at a 24% discount to its IPO price by simply waiting two months. You could have also picked up shares of Twilio at a 19% discount to its IPO price by waiting 11 months. The same goes for Coupa, which you could have bought at a 30% discount five months after its IPO.
I have no doubt that the current crop of IPOs will also go on sale in the coming months. When that happens, these stocks will go from hyped up to hated. And that’s when you should plan to swoop in.
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Overpriced tech IPOs sell grand visions but aren’t worth their valuations
The year of the tech IPO is 2019. Uber went public on May 10 with a US$82.4 billion valuation. Fellow ride-sharing app Lyft floated in March with a U$24 billion valuation and Pinterest had a US$10 billion IPO in April. More big names – including Slack, Airbnb, WeWork and Palantir – are set to follow.
But Uber’s share price began to slide as soon as it went public. Lyft’s shares have also been on a downward trajectory since March. So it’s worth considering how astronomic valuations for these non-profitable companies are calculated.
Is there any science or rationale upon which to base the values, or are they purely hype on the part of those standing to benefit most? This would include early investors, the board and investment bank advisers promoting the offers.
In reality, there is surprisingly little evidence supporting IPO valuations. It is almost impossible to establish a relationship between the underlying data and the valuation. The main influences are clear: a resonant company vision and rapid user growth.
Lyft’s share price has been falling since its IPO at the end of March 2019. Yahoo! Finance
Vision and growth
A company’s vision normally sketches out how its future is going to be different to its competitors and how this will benefit the business (and shareholders). Uber and Lyft, for example, suggest that urban dwellers will not need to own a car, with access to their hassle-free vehicles. Somehow the introduction of autonomous vehicles will also benefit the taxi hailing businesses.
The end of car ownership could be some way off and predicting the future over such a long time period is fraught with risk.
The real vision for most technology platforms is to emulate , Amazon or Google and create network effects, which is the phenomenon where the more customers you get, the more useful the product or service becomes, attracting more suppliers which in turn attracts more customers.
As for user growth, this may be measured in different ways – such as people signing up to the product or service and active, return customers. Growth trajectory is important. User growth forecasts are made, which do have some relationship to the valuation at IPO and beyond.
The focus on user growth, however, often fails to account for a business model’s switching costs. Businesses with low switching costs can gain users rapidly through low pricing, but lose them to someone else equally rapidly with the offer of a better proposition.
So take taxi ride hailing. Uber has burnt billions of cash every year by subsidising driver pay and offering customers cheap fares. At some stage investors will tire of funding this so prices will need to go up and driver incentives will need to be withdrawn. Both customers and drivers may then choose to go elsewhere.
Uber drivers on strike in the run-up to the IPO was a timely reminder of Uber’s precarious relationship with one half of its network, as well as providing poor PR ahead of its IPO. Uber’s growth slowed rapidly in 2018. In turn, cash burn increased as it attempted to maintain the critical user growth trajectory ahead of its IPO.
Meanwhile, competition remains strong, with traditional taxi firms increasingly developing their own apps, with no proprietary technology involved. So it begs the question: can the ride hailing tech company pay off, if profits are still yet to be made?
Pay attention to cash burn
The current rush of tech IPOs at early stages of their development is ly related to fears of investor fatigue setting in, particularly if companies keep falling below their initial price. Plus, there are signs that interest rates are on the rise, which will reduce the amount of money investors are willing to spend on IPO investments.
Following the dot com crash of 2000, the rate of cash burn should be taken as a warning sign to investors. The vast majority of venture capital-funded tech start ups collapsed as investors lost confidence in their ability to ever make profits.
Indeed the current batch of technology startup IPOs are taking place at a much earlier stage of company development than previous IPOs. As a consequence, they are much further from eventual profitability and cash generation than earlier IPOs.
Uber lost US$3 billion in operating profit in 2018 according to its IPO filing, while Lyft lost US$900m and both admit to being some distance from making a profit.
The key issue for investors is whether IPOs allow new investors to make a return through the share price going up. If they are initially priced too high – Snap Inc in 2017 and, more recently, Lyft – then new investors are looking at losses. Snap is down 32% on its IPO while Lyft is down 25%.
Ultimately it is possible that both Uber, Lyft and other tech companies are worth very little. They are not yet profitable and there is little concrete evidence that they have any long-term value. Diminishing user growth, while spending huge amounts to try and mitigate their losses is a cause for concern.
Valuations are almost entirely speculative and supported by little more than the trajectory of sales and user growth, funded by an enormous cash burn.
In short, many of the tech IPOs of 2019 are about finding someone to buy the investment the promise of a grand vision, with few financial fundamentals to back it up.