Lyft’s Slide Warns Of IPO Wild Rides

What goes up must come down.

The converse is true, too, but the slide in Lyft shares, on merely its second day of trading, shows the vagaries of getting in on the ground floor – when, in fact, there’s a basement, too.

At this writing, the stock is down a bit more than 10 percent, to roughly $70. That’s below the initial pricing of $72, and a significant drop below the $88 zenith seen in intraday trading on Friday.

There are a few “maybes” behind the drop – which, taken together, add up to a “likely.”

There’s the quick buck to be made – such as the people who got in early in the day or were already holders, who sold higher, and maybe sold a bit more on the way down. We surmise they are not the holders widely reported by the press to have been the biggest beneficiaries of last week’s IPO – such as Rakuten, the ride-hailing company’s biggest shareholder, with a stake valued at about $2.4 billion coming into Monday’s trading, or Lyft’s CEO Logan Green, with a stake Bloomberg estimated to be about $665 million pre-Monday’s slide.

That’s because of a lockup period that stretches out over several months. So, beyond some flipping of shares from the retail investor side of the equation, there may be a more fundamental reason behind Monday’s action. Boil it down to one word, and the word would be doubt.

To put it another way: IPO euphoria gives rise to an examination of things like competition and margins.

Recall that four investment houses initiated coverage last week, with some neutral ratings among them, and price targets have been near (or, okay, now above) recent trading prices. CNBC noted Monday (April 1) that per one analysis, the somewhat muted reception comes as the company has continued to report losses, and faces a competitive landscape that still remains … competitive.

Per an initiative from Consumer Edge Research (and analyst Derek Glynn), with a $73 price target, “Following years of significant improvement, we believe market share gains and revenue growth are poised to slow as competitive pressures mount in the ride-sharing industry.”

We contend that a pressured top line (courtesy of, of course, Uber, and maybe even regulatory pressures, and headlines documenting workers’ dissatisfaction over pay) would not do much to help the red-ink-stained bottom line, where Lyft lost $911 million last year. Losses, in fact, have steepened; while revenue gained nicely in 2018 to $2.2 billion from the prior year’s $1.1 billion, the loss grew to that aforementioned number from $688 million in 2017. And yet the company is targeting 20 percent EBITDA margins, where investments continue, especially in adjacent markets such as electric scooters.

In another example, Guggenheim, another Wall Street firm, has said along with its neutral rating, “positives for Lyft include a large total addressable market with modest penetration, rapid topline growth, share gains and positioning in the middle of several broader shifts … all very attractive features, but just not enough to offset our questions around Lyft’s ability to both grow fast and reach its target margins in what is a highly competitive category.”

So, the lift has lifted, and Lyft, at least early in the game, is a “show me story.” A few days’ trading does not a trend make, but the ride is sure to be bumpy.