Lyft’s IPO Was a Success, Just Not for Investors Who Bought on Friday
nytimes.com
nytimes.com
... not really? Most of those folks are locked out for several more months and can't sell -- at which point the stock may suffer increased selling pressure, much like Snap. These folks are no more successful now than they were a week ago.
Also the IPO price was $72 -- and Lyft is selling at $69 right now, so, no, the institutions that bought the IPO are not having a windfall at present. (But now I see this article was published Friday, before today's continued decline, so I see why this made it past the fact checkers.)
I found this simple graphic a great distillation of why Lyft and Uber may be considered overvalued:
This of course depends on when they sell, or sold!
Also, that graphic doesn’t make Uber and Lyft seem all that overvalued - does it really seem unusual for Lyft to do as well financially as Delta?
Delta's operations threw off $7 billion of cash in their FYE 2018 [1]; Lyft's burned over $280 million [2]. In the same period, Delta's net income was almost $4 billion [a] while Lyft lost over $900 million.
Lyft is not doing as well financially as Delta. Instead, its investors are betting that it will--in the future--do much better than Delta is doing today.
[1] https://www.sec.gov/ix?doc=/Archives/edgar/data/27904/000002... page 56
[a] page 54
[2] https://www.sec.gov/Archives/edgar/data/1759509/000119312519... F-8
[b] F-4
Here is an 60-minute interview, in 1999. The journalist/expert made the same argument as in your graphic, that a software company is overvalued because its market cap is higher than traditional companies
https://youtu.be/VuI-ss5aQU8?t=629
the interviewer literally laughed at how Amazon is overvalued, because its stock price was worth 20% MORE than a real company like Sears. Your graphic uses the same logic as that interviewer did in 1999.
But I'll note that for every Amazon there's dozens or more Pets.com. So, yes, maybe Lyft is the next trillion dollar company -- or maybe it's, you know, a cab company.
You can argue that Lyft will become Pets.com, due to other reasons, such as growth potential etc. That would make sense.
BUT, the argument in your graphic, that a company is overvalued simply because its valuation is higher than traditional well-known brands, that ARGUMENT is flawed.
Lyft's valuation is totally independent of Ford's valuation. These are separate companies with separate paths. Amazon's valuation was not tied to Sears--the 60-minutes journalist made the mistake of connecting the 2 together. The argument behind your graphic is wrong.
"I found this simple graphic a great distillation of why Lyft and Uber may be considered overvalued"
And that's the most simplified model possible. If you have a 1/1000 chance of being worth a trillion dollars, you may also have a 10/1000 chance of being worth ten billion dollars, 100/1000 chance of being worth one billion dollars, and 200/1000 chance of being worth 100 million dollars. That adds $220 million of expected value. You can add another couple million if you account for the company still having liquefiable assets even in the case that it ends up folding like Pets.com (which ended up returning at least a few million dollars to their shareholders: https://www.sec.gov/Archives/edgar/data/1100683/000089161802...).
If Lyft becomes the next Pets.com and goes bust, its stock would be worth $0. If that happened, it would be laughable to say that Lyft is under-valued, simply because Ford is valued in the billions.
Ford's valuation has nothing to do with how Lyft is valued. To say that Lyft is over/under valued because Ford has X valuation, like what your graphic is saying, makes no sense at all.
For example, the graphic includes both Delta and American Airlines as well as Jetblue. Airlines are effectively a zero-margin business for some interesting reasons (https://philip.greenspun.com/flying/unions-and-airlines). You might say, so are Uber and Lyft, but airlines have a static business model that hasn't changed for decades, can't fundamentally change because it's regulated within inches of its life even after "deregulation", and Delta and American have no real room for growth.
Ford isn't really even comparable. It's a car manufacturer. At least airlines transport people from point A to point B. Likewise for Embraer, which manufactures jets.
Royal Caribbean is a cruise line, which puts it more in the "leisure" sector than the "transportation" sector. (Can you expense Uber or Lyft for work? Yes. Can you expense airline tickets? Yes. Can you expense a Royal Caribbean cruise? Not likely.)
And that leaves a shipping company and a car rental company, which are at least in the same ballpark as airlines in that they're basically logistics companies (with an optional customer service component), but Uber and Lyft are different from these in that Uber and Lyft don't have to manage the physical capital.
Do I still think Uber and Lyft are likely overvalued? Honestly, yes, and that's why I don't buy them. Am I shocked that Lyft is approximately as valuable as Delta Airlines? Not at all.
If the share price falls over the lockup period, employees end up owing tax at a share price higher than they are able to sell. Some of that is usually offset by the company withholding some of the released shares for taxes, but the current withholding rate is substantially under most engineers' marginal tax bracket. It amounts to a ~10% extra tax penalty on the share decline.
RSUs are withheld at Federal bonus rates, which seemed pretty reasonable (it's 25% until your total taxable comp from an employer hits $1M in the tax year, and then it jumps to 39.6%); and California equity statutory rates, which is the second to top marginal rate, which works out right, unless you made enough to pay the mental health tax.
Although, given that state tax isn't deductible anymore, perhaps 25% isn't nearly enough at the federal level anymore?
Realistically, since the standard deduction is way more than SALT deduction plus the maximum mortgage deduction, few people are going to end up deducting those, unless they've made a lot of charitable contributions or had a lot of medical expenses in a given year.
The analysis of 2018 tax return trends is going to be very interesting.
Snap was certainly overvalued at IPO, again heavy losses and very large revenue growth projections. Each quarter that they missed in their MAU growth and/or revenue growth the stock got hammered. It hit a low and now is rebounding to more sensible levels. If they can get their spending more under control and continue their positive revenue growth they will mature into a solid public company.
The other challenge for Lyft is that it’s hard to find a comparable. For Snap you have twitter and Facebook so you can estimate the costs it takes to run the operation as well as the potential revenue on a per user basis from two publicly traded companies that have both been in the market for a while.
With Lyft what stock would you use as a comparable to better understand their cost structure at scale as well as the proper way to value their customers true LTV?
The stock is still trading well above the last private round. I would consider it entering into true bear territory if it starts trading below the last private valuation. Which is what happened to Snap.
Then that shows you that valuing a stock on future growth especially at the later stages can be quite dangerous as any misstep is magnified.
This is also challenging news for Uber really. Because it has a similar story. Great revenue growth but heavy losses. If anything coming out first was great, they get all of the press and attention. The IPO was a great success internally because they capitalized the company well and given the pop and the receding stock price they didn’t leave any money on the table.
Now that they are public it’s going to be about the long game. Given the heavy drop in price, you would expect this to continue for the next several quarters until after the lock up period when more shares will hit the market. They need to keep hitting their numbers with no negative surprises as well. It’s not crazy to see them get adjusted down 30-50% and have the stock settle into a floor before the fundamentals of the business really take over in terms of valuation.
They could theoretically conspire with another person who runs the trade but eventually compensates the principal. They'd only be found out through regular white collar crime fighting measures: parallel construction from NSA sigint for example.
It's the same here. Buying/selling options on Lyft as an employee is against their employment contract, and probably SEC rules. If they make a few thousand dollars doing it, chances are no one will find out.
If they make a few million, the SEC will probably look into that.
I’m not sure about the case of an employee that has left the company, but I expect that it would still qualify as insider trading through some window.
The rules aren’t there just because Lyft wants to be mean, they’re there because regulations require it and also because one of the guiding principles is “no perception of insider trading”. That means you have to avoid behaviors that might look like insider trading.
A current or recent insider using hedging is very suspicious looking. What do they know?
When I left Netflix I was warned that I needed to wait at least three months before making any trade other than buy. And I was still restricted to the employee trading window for six months.
Irregular options activity does get noticed and investigated, take a look at some SEC enforcement actions for insider trading: https://www.sec.gov/spotlight/insidertrading/cases.shtml
If a Lyft employee quits 2 months ago, and then buys puts on their lockup RSUs, I don't see how this is something the SEC cares about. At worst it's a contractual agreement between the employee and Lyft, no?
Basically, Lyft would have agreed with the underwriters not to exchange RSUs for the underlying shares of stock, so the employees couldn't sell any shares on the market. The RSUs, by their terms, generally have restrictions on who they can be sold to--usually just back to the company or purchasers approved by the company. If those restrictions are not adhered to, then the issuer of the RSU (i.e., Lyft) can void the sale transaction.
Most of the 72$ shares sold pre-IPO to retail investors were dumped on IPO day to make a quick profit. The individual investors and employees that are still in LockOut are now holding the falling knife
Why do you think any retail investors got shares at $72?
That is... not how that metaphor works. You want to avoid trying to catch the falling knife by placing a trade that attempts to time the market on a plummeting asset. But if you already hold it, and can't make any trades, well...
Speculators take on a lot of the risk, whether they be small or large.
[1] https://www.nytimes.com/2019/04/01/technology/lyft-stock.htm...
I don't have that expectation. IPOs are risky. IPOs of massively loss-making companies' non-voting stock are riskier still.
But when two sets of investors--on institutional and one retail--bought stock within days of each other, under similar informational and macroeconomic circumstances, and one of those groups (the latter) was prohibited from buying at the price the other (the former) bought at, and a single institution is the arbiter of the price at which bucket A buys and sells, and bucket B gets screwed to the tune of 20% on a day the general markets rose, it's a reason to call out the bookrunner as a numpty. Particularly for a name, like Lyft, that will disproportionately depend on retail investors buying their stock for months to come.
You could short Lyft, but do you have enough money to wait out the people that just saw them raise 20 billion?
Lyft beat Uber to IPO and raised a bunch of money. If Lyft's stock tanks, Uber will get an extremely depressed IPO and raise far less money while having a far higher burn rate. This could possibly cause Uber to collapse before Lyft and leave Lyft as the remaining big player in the space.
In short, the market is likely to remain irrational longer than you can remain solvent.
It's not "good". It's "less bad".
And, the really interesting question is if Uber implodes and leaves the field to Lyft, can Lyft actually take advantage of that? That's not at all clear, either.
So, it may simply be that Uber leaves a bigger impact crater before Lyft does.
You're assuming that manufacturers would do this instead of selling (or even leasing) the cars to companies like Lyft and Uber directly. I don't think this is a sound assumption. Most industries separate operations from manufacturing--shipyards and shipping companies are separate companies; aircraft manufacturing and airlines are separate companies; locomotive manufacturers and railroads are separate companies. If Lyft can barely break even long enough to survive to the invention of self-driving cars, they will be the ones providing cars on demand because that's what they already do.
Many companies have been railroaded by the banks to price their IPO shares so conservatively that they make relatively little money on the IPO. It may be dwarfed by the amount the banks and investors make in a few days.
Taking the long term view, maybe this IPO is just fine. The company gets funds, they grow their business and the stock will rise well over time.
IPOs traditionally had four purposes:
(1) Introduce a company's securities to public-market investors;
(2) Price said securities;
(3) Let existing investors sell; and
(4) Raise money for the company.
> Taking the long term view, maybe this IPO is just fine
Analysts overstate the importance of IPO dynamics. Facebook had a terrible IPO and. Snap had a great first day [1]. That said, burning an entire class of investors (retail) on day one, particularly for a brand like Lyft, isn't a great show. It's also reasonable to call out the bookrunner, JPMorgan, as a bad choice for future IPOs.
[1] https://www.cnbc.com/2017/03/02/snapchat-snap-open-trading-p...