Investors who want to try their luck on the shares of loss-making Lyft (NASDAQ:LYFT) will have to make the decision to believe in the company’s excellent growth story and get ready for a long and bumpy ride.
The San Francisco-based ride-hailing company will begin trading today after a very successful closing of its initial public offering that was expected to raise $2.2 billion after the company increased its expected IPO share price range to between $70 and $72 per share. At $72 a share, Lyft would be valued in its IPO at about $24.7 billion on fully adjusted bases, according to Bloomberg estimates.
This reception shows investors may be a little too excited about the second-largest ride-hailing company after Uber Technologies, despite its revenue having doubled in 2018 to $2.2 billion, fueled by explosive growth in the number of people who are shunning their cars for the comfort of a hassle-free, technology-driven ride.
But these numbers tell only one side of the story. Lyft isn’t making money yet. In fact, it’s burning cash and there is no visibility on when it will turn into a profitable venture. Lyft lost $911 million in 2018—up 32% from the year before, and burned about $350 million in cash.
Investing in loss-making tech firms has been a mixed bag in the past decade and investors' enthusiasm about a hot tech IPO didn’t pay off in all cases. Some made fortunes by buying the shares of Amazon (NASDAQ:AMZN), for example. The e-commerce giant had negative free cash flow for four of its first five years as a public company.
The parent of photo-sharing app Snap (NYSE:SNAP), on the other hand, has been a disaster for those who believed in the company’s potential and rushed to buy its shares at the $17-a-share IPO price. Snap stock was trading $10.79 at yesterday's close, about third of its value after sliding from its post-IPO hype.
A Solid Business Model
However, we believe Lyft's business model is solid. With strong underlying demand for a hassle-free, safe and affordable transportation service, Lyft is in a great position to continue growing its revenue: it had 30.7 million riders and 1.9 million drivers in 2018, a massive volume that helped the company to raise $8.1 billion in total bookings during the year. That explosive growth also helped Lyft to increase its share to 39% of the U.S. market as measured by the number of trips.
While competing with Uber in the race to become the first publicly-traded ride-hailing service, Lyft expanded aggressively into smaller and mid-sized cities in North America. In contrast to Uber, which is trying to do a host of different things to impress investors before its own planned IPO later this year, Lyft hasn’t shifted its focus away from its core ride-hailing business.
While there is a strong case for betting on Lyft’s future prospects, investors should also remember that the company hasn’t yet shown a path to profitability. In its filing with the Securities and Exchanges Commission, Lyft warns that its spending may continue to increase and that it may not be able to achieve or maintain profitability in the future.
Heavy losses and a lot of spending, in our view, may keep the shares under pressure. Besides these company-specific risks, investing in any tech IPO in the late bull-cycle has its own downside.The majority of today’s tech giants haven’t been through a recession and we don’t know whether the tech start-ups, which are still in the red, can endure a sharp downturn in the economic activity.
Bottom Line
Given the uncertain global macro environment, we don’t advise investors to add further risk to their portfolios, especially in the domain of technology start-ups. That said, ride-hailing business isn’t going to die off and Lyft will find a way to balance its books at some point. The stock has a strong appeal and after the successful IPO, it has momentum and a lot of cash to burn. If you’re a risk-taker, Lyft shares are worth taking a shot.