Let’s talk about unicorns.
Not the single-horned mythical creatures we all wish existed. But the corporate kind.
If you’ve spent any time in front of the TV in the first few weeks of April watching CNBC or Bloomberg, we bet you’ve heard various over-paid Wall Street strategists and news anchors refer to Lyft (NASDAQ: LYFT) as a unicorn.
It’s a bit silly, but in the business world, a unicorn is merely a private (or start-up) company that achieves a $1 billion market valuation as determined by a private fund-raise.
We think the whole idea of unicorns in business is silly. Unlike 10 or 20 years ago, today there are a ton of private companies valued at or above $1 billion.
You see, in the late-1990s a company needed to go public to achieve a big valuation. But that’s not the case anymore.
In today’s hyper-regulated and overly-litigious business environment, it’s easier to achieve a 10-plus figure valuation by remaining private. And you know what else? it’s a hell of a lot cheaper to stay private.
Most people don’t know this, but being a public company comes with a ton of hidden costs and unavoidable overhead.
So, setting aside whether companies should go public or remain private, the bottom line is unicorns aren’t as rare as they used to be.
Growing Revenues and Sinking Profits
Before Lyft first began mulling over its IPO price — the company, and its investment bankers thought to offer shares to the general public between $62 and $68 a share.
Now, we want you to understand something.
Lyft disclosed making around $2.2 billion in revenue in 2018. But in generating all those sales, the company managed to lose more than $911 million!
That $911 million loss in 2018 far surpasses its nearly $683 million loss in 2016 and $688 million loss in 2017.
We don’t care if Lyft is “laser-focused on revolutionizing transportation” as the company claims in its S-1 document filed with the Securities and Exchange Commission (SEC). Growth investors may love revenue growth. But they also want to invest in companies with wide moats (a competitive advantage) and some expectation that the company will turn a net profit.
And aside from a cool app — which Uber also has — and an early-mover advantage in the sharing economy, we don’t see the need or the logic in owning shares of Lyft at its current valuation.
The bottom line is that Lyft is opening doors for its passengers with one hand while throwing as much money as possible out the window with the other.
A Botched Lyft-Off
How a company and its investment bankers manage the pricing of an IPO can go a long way in determining whether that IPO is successful, or devolves into a money-pit of retail despair.
Now, as we previously stated, when Lyft first began to discuss its IPO pricing, a range of $62 to $68 was given.
And while a banker never likes to price an IPO near the low end of a range — because that suggests weak demand for shares — we are thinking anything north of $68 ran the risk of being quickly sold.
Suffice it to say when Lyft announced that its shares would be offered to the general public at $72 on March 29, 2019, and then pre-opening demand drove that price into the upper $80 range, we said a quiet prayer for the retail public dressed in sheep fur that was about to get painfully fleeced.
You see, when Lyft opened for trading around $87, it made absolutely no sense for anyone with the ability to sell their shares, not to do so.
And that’s exactly what happened.
Shares of Lyft may have attracted buyers in the upper-$60s or even low-$70s, had they been priced more reasonably on day one. But seeing shares priced in the upper-$80s sent potential buyers back to their hidey-holes.
Today, shares of Lyft are trading in the upper-$60s, beneath the official $72 IPO price, and a long way away from the IPO-day high of $88.60 that occurred during the second minute of official trading.
Worst still, Lyft is officially a broken-IPO.
Unicorn Hunting Season?
While Lyft’s abysmal IPO showing is bound to frustrate late-stage and IPO-day investors, tech investors have a bigger problem on their hands.
With high-profile unicorns like Uber, Airbnb, Slack, Palantir Technologies, Pinterest, and Postmates are all expected to debut on the public markets in 2019, the fact that Lyft has failed to generate strong demand from investors following its IPO pricing creates a problem for bankers.
Remember, investment bankers want to make as much money as possible.
Not for you! But for themselves and their clients.
If a bank dramatically underprices an IPO, the company that’s becoming public can miss out on a massive cash infusion. And the investment banker earns the unpleasant reputation of being unable to judge underlying demand adequately.
But the last thing an investment banker wants is a reputation for grossly overpricing an IPO.
Ultimately, a company and its bankers, collectively, need to determine where strong demand is.
Because in the end, it’s better to underprice shares and see them surge higher (a company can ALWAYS issue a secondary offering at a higher price) than price shares too high only to see them careen off a cliff and morph into a broken IPO situation that no one will want to touch with a 10-foot pole.
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