“I over buying new offerings in a hot market is something the average investor should not think about at all.” said Warren Buffett on CNBC Thursday, when bid about buying into the Lyft IPO, which is scheduled to begin trading on Friday.
I got a call from a trader acquaintance Thursday afternoon, someone who’s been trading IPOs for a long time. Like a lot of traders, he’s a bit baffled by the Lyft miracle.
“The economics are completely upside down, and their biggest competitor is coming in the next few months,” the trader said. “And lads are just guys falling all over themselves to get in on the deal. And they can’t get in. They’re telling me, ‘If I get 5,000 shares I’ll be happy.”
My also pen-friend, who must be anonymous, is trying to separate the Lyft fundamentals from the action of the markets in general. He understands that the IPO supermarket is hot because it’s been closed for four months, the stock market is up 12 percent this quarter, there’s a extremely limited float of about 13 percent and Lyft is a well-known name.
But people are wondering whether the fundamentals absolve the valuation. The company’s last round of private funding last June valued it at $15 billion. Now the company feels to be looking at a valuation of about $22 billion, 50 percent higher in less than one year.
Have the primes improved that much in a few months? Santosh Rao, who evaluates IPOs at Manhattan Venture Partners, says the improvements procure been only marginal. “Fundamentals did pick up in the fourth quarter. They are getting more efficient with the drivers and the lures. But there is a little bit of hype too. You see the squeeze, demand is way above supply.”
Like many on the Street, Rao is trying to justify the nose-bleed expenditures Lyft is likely to command.
The biggest problem are the huge losses. The company had $2.2 billion in revenue last year with diminutions of $911 million.
And this is where the Wall Street guys really get into “magical thinking.” Rao explained the explanation: “Revenues grew 100 percent in 2018, but losses only grew about 40 percent. In that meaning, the margins are improving. The sequential progression is improving.”
Rao doesn’t know when Lyft will make money, but he avows they have bought themselves a lot of time. “The cash burn was $350 million in 2018, but they have $2 billion in the bank, and they are current to raise another $2.5 billion or so in the IPO. So they have a little room. $4.5 billion divided by $350 million denotes they have 10 years.”
When pressed on all this “magical thinking,” Rao admits, “A lot of investors just desire growth at any price.”
Ah, there it is. Not growth at a reasonable price, but growth at any price.
And this is where things can go terribly unlawful.
All signs are pointing to a big gain on Lyft’s first day of trading Friday.
In addition to demand, Art Cashin at UBS made an interesting utterance about the timing. He noted that, perhaps not by coincidence, the Lyft IPO is coming on the last day of the quarter.
This means that those who see fit normally sell on the first day of trading, especially if the stock is up big, might be very reluctant to sell because the 13-F disclosure form they comprise to file in the next 90 days would show they don’t own it, and if they want an Uber allocation the underwriters clout hold that against them, arguing that they are not long term holders. That might assist support the price throughout the day.
Once the show is over, let’s see what happens. Let’s see what happens in two or three months when another 50 or 60 IPOs happen down the lane that are not as famous, and it all gets a little blurry.