A Tale Of Two IPOs

Part of the breathless anticipation over initial public offerings (IPOs) ties into seeing how they will perform right out of the gate.

The headlines have been a-swirl with news about pricing ranges and over-subscriptions — both rough barometers of demand. The names? Well, they are marquee names, such as Uber, Lyft, Pinterest and … Levi Strauss.

It’s been, and will be, an interesting mix of new economy and decidedly old economy names.

First thing’s first. The general climate of the stock market might be described as “warm.” Consider the fact that, at this writing, even though indices are down, the broad Standard & Poor’s 500 stock index (a decent proxy for sentiment, we submit) is up just about 12 percent for the quarter, the best showing in about a decade.  The U.S. economy is still growing, of course, but then again the signals from the Fed (i.e. not to raise rates, or at least to raise them only once) show at least some hurry to do nothing while things like geopolitics, trade wars and tariffs continue to impact the world’s biggest economies.

And so, amid lofty markets and what seems a late-stage economic boom, an attendant feeling of “this might be as good as it gets” may have spurred firms looking to list on public exchanges to finally pull the trigger. The valuations run to the billions of dollars, and in fact if you are Uber, it’s well more than $100 billion.

An examination of the recent launches of Lyft and Levi Strauss illuminates seemingly perfect bookends of the market. Investors, no matter the company in which they invest, are taking (usually a very, very small) ownership stake in a company, and by extension its future earnings, perhaps dividends. Or perhaps they are simply betting that someone will buy the shares for a higher price down the road. Growth is the name of the game, at least for many.

This past week, Lyft’s pricing range was $62 to $68 a share; that was the targeted range for trading slated to begin on Friday. As reported in The Wall Street Journal, the late Thursday range may be in the low $70s on Thursday. The valuation would be well in the $20 billion plus range.

The company loses money, a lot of it. Lyft in fact lost as much as $191 million last year, and yet has targeted Ebitda margins of 20 percent, as it seeks to cut at least some costs (such as insurance costs). Though the ride-hailing business is a relatively new one (and gross bookings are up more than 75 percent year over year) and so is the gig economy at large.  There are ongoing controversies over Lyft (and Uber) drivers striking over wages — which means costs are still uncertain (and headlines could be negative, which mean investor sentiment could turn too).

The Lyft data stands in stark contrast, for example, to Levi Strauss, which last week went public on the NYSE, and which now has returned to trading after a 34-year absence. The range then had been $14 to $16, the pricing at $16. The first day of trading ended at $22.41. A 30 percent-plus gain on the first day of trading is nothing to sneeze at.

Sales have been growing at about 2 percent and change, outpaced by net income. The firm wants to become known for more than making jeans, and is looking toward shirts, women’s clothing and winter gear, for example. Levi’s also thinks it can grow through an acquisitive strategy to become a “lifestyle brand” internationally.

Out-of-the-gate IPO pricing is fun to watch, but it’s the marathon of proving new business models that ultimately matters. Stay tuned.