Like a long-awaited graduation, Lyft wrapped its first day of trading on the NASDAQ on Friday, beginning what’s expected to be a brief period as the lone publicly traded ridehailing company in the US.
Lyft priced its shares at $72 apiece Thursday, the top of its upwardly revised range. Trading commenced at $87.24 early Friday, representing a 21% premium over the final IPO price, but shares gradually dropped down to around $80 per share by early afternoon. Excitement waned, and trading slumped thereafter to ultimately close at $78.29, down around 10% compared with the opening price. More than 71 million shares changed hands during the day, including after-hours trading.
Traditional predictive metrics, such as a price-to-earnings ratio and short interest, don’t seem to apply to Lyft’s stock, as the unprofitable company—which posted a net loss of $911.3 million in 2018—has not publicly announced any solid roadmap to profitability. Investors seem to be flocking to Lyft with an abundance of speculation and hope that the seven-year-old company will ultimately follow through on the goals laid out in its S-1: using autonomous vehicles and reducing human labor to get the company in the black.
As trading progresses over the coming weeks, the implied volatility in the stock’s developing options market, in addition to technical analysis, will be telling of how much volatility and bullish or bearish sentiment is anticipated moving forward. With an oversubscribed roadshow under its belt, an 8.7% closing price increase and a 21% intraday spike on the first day of trading after higher-range IPO pricing, Lyft’s stock displays early evidence of a bullish sentiment for the near-term.
As the general public gains partial ownership in the famous pink mustache, here are a few key points investors should consider when deciding whether to jump on the Lyft bandwagon.
Uber is a jack of all trades, master of none, while Lyft excels at one thing: ridehailing
Uber is diversifying its businesses beyond ridehailing, yet Lyft isn’t following suit. Its business is being augmented by its entry into bicycle and scooter rentals, as evidenced by the purchase of bike-sharing startup Motivate in July 2018 for $250 million, but Lyft continues to focus primarily on the US ridehailing market. In its S-1 filing, it reported capturing 39% of US market share as of the end of 2018, up from 22% in 2016.
While its main rival is being bogged down by troubles associated with international growth, such as intense protests and regulations in Europe, plus a fierce and costly rivalry with Ola in India, Lyft has no such issues and operates a leaner, cleaner business, comparatively speaking.
“Unlike Uber, Lyft is focused primarily on the US ridehailing market and presents a much cleaner growth story to investors wary of Uber’s forays into lower-margin international markets and other untested markets, such as food delivery,” said Asad Hussain, an emerging tech analyst at PitchBook. “Moreover, while Uber’s core ridehailing bookings growth is slowing, Lyft’s revenue growth is robust. […] Overall, we believe that Lyft could present a more compelling opportunity for public equity investors interested in investing in the US ridehailing market.”
While the bullish argument would suggest this is decisively great for Lyft, as it allows the company to succeed at its core business without costly bloat and risky international liabilities, a bearish take could view this as detrimental to the company’s competitive advantage, particularly for investors indifferent to Lyft’s US-centric existence.
If Uber were to radically change its overseas fate toward a more successful, highly profitable presence, Lyft would immediately fall behind from an investor’s standpoint. Lyft’s current positively viewed, US-based specialization would be suddenly viewed as a globally underdeveloped weakness, making it exponentially harder for Lyft to gain market share once Uber had established a strong, potentially profitable existence in other countries.
While Lyft’s current strength in the United States is shielding it from the troubles Uber is experiencing overseas, this may not always be the case. Investors preferring US-focused businesses may benefit in the foreseeable future, but this is a dynamic factor that could rapidly turn from a benefit to a detriment should ridehailing and associated business opportunities become more profitable overseas.
Lyft-mania may be distracting
Between the psychologically meaningful title of being the first ridehailing service to debut on the US public markets, in addition to the fact that the company has no existing profits or immediately foreseeable profitability, Lyft’s stock inherently incorporates the principles of behavioral finance more than it relies on company fundamentals. “Pigs get slaughtered” is an old phrase on Wall Street meaning that greed will kill an investor’s success.
Both short-term trading and long-term investing should be viewed like running a business involving calculated decisions, instead of being approached like gambling at a casino. In addition to using stop-loss and trailing-stop orders, technical and fundamental analysis, options trading strategies and other logic-based approaches, choosing to simply do nothing in light of bad risk/reward ratios or a lack of promising trade opportunities is yet another smart strategy toward turning a profit in stocks. Sometimes, not doing anything is the best choice.
But as suggested by Lyft’s approximately 10% intraday drop from its $87.24 opening price down to its $78.29 closing, many retail and institutional investors are eager to get in on Lyft-mania just for the sake of getting a piece of the pie. The initial buying rush at Friday’s open faded rapidly, leaving a stop-loss inducing red day for many eager investors who hurried to get in on the action.
While there are differences between Lyft’s situation and the dot-com and crypto crashes—Lyft has an established, revenue-generating business model, for one thing—the underlying psychological concepts that lead to said crashes are evident.
People want to buy in as quickly as possible for fear of missing out, even though Lyft will almost certainly not be paying dividends or turning a profit anytime soon. Its 2018 net loss of $911.3 million was actually about a 32% increase from its 2017 net loss of $688.3 million. Further, its IPO was finalized at the higher end of the anticipated range, limiting the prospect of a value investing opportunity or a mispriced short-term trade.
The particularly bullish sentiment toward Lyft may be more due to its prized status as a highly anticipated IPO and the first ridehailing giant to hit the US public markets. But had Uber listed first, with its international problems and lower margins dragging on its reputation, the story might have been be different—a fact that Lyft seems well aware of.
“We believe Lyft chose to list ahead of Uber so as not to be burdened by the dominant ridehailing player’s likely lower valuation multiple and associated scrutiny surrounding its slowing growth profile, numerous corporate controversies and somewhat unfocused future growth strategies,” Hussein said.
Looking forward, it will be interesting to see how Uber’s stock performance plays out, assuming its IPO becomes reality, and to see which psychological forces win out. As Lyft transitions from its final $15.1 billion private valuation into its new publicly-decided, always-changing market capitalization, its high-profile nature and future-based perceived value incorporates both psychology and fundamental investment opportunities, whether that may involve short selling or buying a long position.
Date: April 11, 2019