The IPO of ride-sharing unicorn Lyft is likely (this afternoon) to price at the top end of the upwardly revised US$70-$72 range or better after drawing huge demand from investors during the two-week roadshow.
Though there’s plenty of angst about Lyft’s cash burn and the fact it lost US$911.3m last year, at this point it simply doesn’t matter.
Reservations about the ride-sharing business model – in short, give it away if you have to, but get to scale as quickly as possible – and various regulatory issues are well-founded. But in Lyft’s case, these are questions for another day.
IPO investors want to invest in growth and companies that are doubling their top-line at scale don’t come along often.
Even if the overall market takes a breather here, companies that are growing at rates well in excess of the broader market and carving out new industries should fare relatively well.
This is probably why – somewhat counterintuitively – high-growth (tech) and defensive stocks outperformed in Q1, a quarter that saw the Federal Reserve become much more dovish and recession fears ease even with trade concerns top of mind.
Though Lyft’s financials are splotched with red ink, the growth is undeniable as is the potential size of the ride-sharing market if Lyft and Uber and others succeed in killing off household ownership of the automobile.
Anyway, that’s the potential. At this stage it is almost pointless to predict whether this happens and whether some other unicorn emerges with a even better model to deliver what Lyft calls “transportation-as-a-service”.
The IPO roadshow was standing room only and virtually everyone who got a chance put in an order.
Lyft made it clear in its filing it was not focused on short-term profits, or profitability at all, but investors won’t be too worried as long as the company is growing.
The lingering question is whether Lyft or arch-rival Uber, soon to follow with its own IPO, is the better bet.
I heard someone say yesterday that Lyft is just a smaller Uber with better PR. Of course, there are some differences between these companies in their geographical reach and the extent of their focus on other businesses, but it is true the ride-sharing experience is close to identical for customers.
Given the financial profile of the industry, that means the company with the deepest pockets is likely to have the most success.
Because of its larger size, Uber should be better placed to raise additional capital (equity, debt, convertible debt etcetera) and outlast Lyft in any extended price-based market share war in key cities.
That said, there may be room for both and investors at the moment clearly figure that Lyft is a great bet on the ride-sharing phenomenon.
Jeans maker Levi Strauss & Co surged 31.8% on debut today after pricing its IPO above range for base proceeds of $623.33m, the most confident sign yet a new-issue revival is under way after a disastrous start to the year.
Levi Strauss is the biggest IPO of the year so far and comes ahead of chunky near-term offerings such as Lyft, Tradeweb Markets and Change Healthcare, and maybe Uber (looking like April timeframe) as the biggest of them all.
The demand for Levi Strauss was clearly very strong, even stronger than you might expect for a company up against the vagaries of the fashion retail business.
This is a brand that has stood the test of time, the company has some growth (14% at the top line last year) and has been able to expand its margins by selling direct to the consumer, the trend that is likely killing off large parts of the traditional retail sector.
One reservation – apart from whether the company’s current growth is really sustainable – is that the controlling Haas family sold some of its stake at the IPO and may not be done. The prospectus is not explicit about their plans, which is probably intentional, but it means that a secondary sale is not out of the question later this year.
As investors counted their winnings, it was easy to miss that another IPO scheduled for this week, human resources software company Alight, opted to defer its IPO ahead of pricing tomorrow night.
Alight is backed by private equity firm Blackstone, which pulled the plug as investors showed reluctance to pay up inside the $22-$25 range for a company that is not growing as fast as the usual software IPO.
In fact, the way the financials are laid out in the prospectus, it is difficult to make prior-year comparisons.
The outcome shows that investors are not in a mood to buy anything, despite the dearth of IPOs so far this year. This could also be read as investors being extra cautious about current valuations, including those of the peers against which Alight was valued.
The other mark against Alight is its private equity backing, and it is a legitimate question whether the sponsor-backed IPO market, a major avenue for the monetization of sponsor investments, is broken.
Though Blackstone was able to bring a large number of its US portfolio companies public in the past five years, it hasn’t done so many in the past year or so.
The same goes for the other big private equity firms, now the center of much power on the Street (in part because they pay the biggest fees to investment banks).
The big miss last year was Apollo Global Management’s IPO of home security firm ADT. The deal priced well below range but ADT stock still trades at price less than half ($6.57 today) the level at which it went public at ($14) in January last year.
In fact, the private equity firms have produced some great public companies over a longer timeframe, but it is often the case that they perform poorly early on (2015’s First Data IPO is another classic example) because private equity firms on principle do not sell assets cheap.
Private equity firms have also gravitated to traditional industrial companies that can be bought cheap for their lack of growth but still generate consistent enough cashflow to support their financial engineering – that is, the pay down of hefty debt loads.
These companies typically come to market with high debt levels as a legacy of their leveraged history, though usually IPO proceeds are applied to bringing down debt to more manageable levels.
Change, a health IT company formed from a deal with drug distributor McKesson, is the next Blackstone portfolio company looking to get public. It is said to be looking to raise $1.5bn-plus but the Alight outcome suggests it is no fait accompli.
Uber or Lyft? Which to use is a question that has dogged New York’s ride-sharers for years.
With both poised to go public in the next month or two, the battle between these two bitter arch-rivals is about to extend to winning over the hearts and minds of the investment community. Things could get really interesting.
On Friday (March 1), Lyft started the clock for its IPO by filing publicly. It registered confidentially with the SEC on December 6, so it is already well advanced through the SEC review process. From all reports, the IPO roadshow will begin March 18 (it has to be at least 15 days after the public filing). With a standard roadshow, the deal should price on either March 27 or 28 before the stock debuts on Nasdaq the following day.
Cue plenty of (valid) commentary about the company’s cash burn and lack of profitability.
Multiply the media frenzy by four (?) once Uber files, which could well be in the next few weeks because (probably not coincidentally) it filed confidentially on the same day as Lyft.
Since it is more complex, larger and a more global beast, and the SEC is going to look really bad if it doesn’t work, Uber’s filing is said to be getting more scrutiny from the securities watchdog.
There is no doubt that ride-sharing is a social phenomenon that promises to revolutionalize and is disrupting transportation, and, depending on your perspective, for better or worse. Less clear is whether the numbers stack up.
Lyft lost $911m last year (net loss but adjusted Ebitda is a similar amount) and burned through $281m of cash (based on its negative operating cashflows).
This is bracing stuff compared with the average IPO, but Lyft also doubled sales last year. Getting to even greater scale as quickly as possible, and outlasting other upstart competitors, is the priority.
I’ve seen IPOs that were growing that fast AND were very profitable at the time of IPO, but, counterintuitively, this can be a sign a company’s best days are behind it. The 2015 IPO of fitness band maker Fitbit is a good example. It presented some of the best financials ever seen for an IPO, but the deal came at or near the peak of its growth just as a host of competitors were able to come into the market with significantly cheaper products.
Though the IPO went well and the stock traded up initially, the deal didn’t stand the test of time. Fitbit stock now changes hands at just 30% of its IPO price.
More important for new investors is what Lyft’s financials will look like after this year and the coming years.
I thought the most interesting part about the filing (apart from the actual finances and the litany of legal actions the company faces) was the final part of the letter to investors from the co-founders Logan Green and John Zimmer.
“If we told you we were building the world’s best canal, railroad or highway infrastructure, you’d understand that this would take time. In that same light, the opportunity ahead requires continued long-term thinking, focus and execution. In order to best deliver long-term value, we will drive the business forward with three key principles:
“1.
We first serve drivers and riders.
“2.
We prioritize the long-term health of the business, over day-to-day reactions of the markets.
“3.
We thoughtfully balance investments in growth and profitability considerations, while deliberately leaning more towards growth (especially in these early days).”
Maybe it is just me but that doesn’t read like a company that is going to swing into profits anytime soon.
The question is: Does it matter? Much like Amazon, as long as the company continues to grow at above-market rates, it will be able to access capital and fund its growth without generating positive cashflow/Ebitda/profits etc.
That growth is the same reason why investors will swarm this IPO, the caveat being we don’t know the valuation.
At the mooted valuation of up to $25bn, Lyft would be coming at 12x 2018 sales or thereabouts (actually less using an EV/sales multiple that subtracts cash and equivalents from market cap used in the numerator)
The multiple comes down quickly if the company can continue something close to the current rate of growth, a doubling of its net revenues last year to $2.16bn.
It is a sure bet that market models will factor in high-growth for the next few years (50%-plus) at least.
Given there are not many growth stories like this around, this alone should ensure the IPO is heavily oversubscribed and (maybe) opens strong.
But whether these forecasts are right are a completely different thing.
Further out, things could be challenging, the fear being this could be more of a Blue Apron than Amazon-type situation. Blue Apron also had growth but huge cash burn in a new market (meal-kits) where the number of competitors offering introductory discounts multiplied quickly.
Lyft is actually the first-mover in ride-sharing but is dwarfed by Uber and there are quite a few other competitors too (Juno and Via in the US for starters).
So far ride-sharing is not like search (Alphabet/Google) and social media (Facebook) that have pretty much been winner-take-all markets, and not necessarily for the first-mover (Yahoo, MySpace).
But it could be, which is why Uber and Lyft are going public at the same time in a race to tap out equity capital providers first.
Talking to a number of NYC drivers in the past few days, it seemed they were all either using Uber exclusively or using both, but not Lyft exclusively.
According to one, using Lyft alone was not enough to make a living, which just highlights how Uber has the upper hand in markets like NYC and probably elsewhere too.
So even though Lyft has more room to grow by virtue of its smaller size, those that doubt the industry’s economics will sustain multiple players are going to back Uber instead.
