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It's been about a week since Lyftof (NASDAQ: LYFT) the shares have become public, but many investors have already rushed to judge the success of the carpool company. The price of the stock has so much spent this week below its bid price of $ 72 per share that Lyft has quickly earned a label as a collapsed IPO. A wave of negativity about the launch was intended to highlight the less attractive risks and attributes of society.
Yet, despite all this hype, Lyft has done an admirable job in making the public public in a way that almost perfectly balances the interests of investors and society itself. At a time when many investors expect huge jumps from day one for IPOs, Lyft may not have achieved the success expected by some of its top shareholders. But it will take much longer than a week to accurately assess whether the fledgling company can reach its full potential.
Source of the image: Lyft.
The real goal of an IPO
It is important for investors to remember that the underlying goal of an initial public offering is not just to create a market for equities. IPOs are also intended to help companies raise funds for additional investments. The more money a company can obtain for its initial shares, the more it can invest in the growth of its business without having to return to the capital markets later to obtain additional funds through additional offers that dilute the value of the company.
With this in mind, it is quite clear that the modern measure of the success of IPOs – the size of the first-day jump – is fundamentally flawed. If the price of a newly public stock doubles on the first day of its IPO price, the gain is huge for those who participated in the offering. But it's also a big loss for the company, because it essentially offered shares at half of what the market thought was their true value.
Think about what happened just before Lyft was made public. In anticipation of its IPO, the carpool service had forecast that its stock would be between $ 62 and $ 68 per share. If it worked with the price of $ 68, Lyft's first day jump would have been 15% instead of 9%. And although the stock has flirted with lower prices, it has not closed below that level of $ 68 in the first five trading days. He closed Thursday at $ 72.
Yet, as Lyft has dared to increase its bid by $ 4 per share – garnering about $ 130 million in additional cash for the company – the potential new investors seem to have a completely different view of how it went. ;Initial Public Offering. Critics blame Lyft's losses for dampening the enthusiasm for the future of the company's business and they seem to be looking for reasons to be disappointing about Lyft's strategic vision.
Where will Lyft be in seven years?
The most important reason why all the hype of the first week about Lyft is meaningless is that investing has nothing to do with how a company realizes its life in seven days and everything that she does for seven years or more.
To be honest, there are many good reasons to be skeptical about Lyft's long-term prospects. The losses have been significant and worsen, the amount of $ 911 million in 2018 red ink marking a 32% jump from the 2017 loss levels. Lyft has a clearly duopolistic rival to Uber, and many other recently introduced carpooling providers are also competing for runners.
Even automakers are getting into the game, potentially seeking to offer their own services and potentially bypassing the intermediary opportunity that Lyft and others seek to exploit. Some investors were also dissatisfied with the vote control that co-founders Logan Green and John Zimmer retained by keeping shares in a special class of shares with higher voting rights.
Yet Lyft could be very different in seven years. The number of active users, the number of trips and the overall income have increased sharply in recent years, as has the income per active passenger. Lyft seems to attract a small audience of enthusiasts, and Uber's controversy has caused some customers to consider Lyft as an alternative.
There has been much discussion about driver treatment for ride-sharing companies, but these issues could go away completely if Lyft's self-driving technology ultimately makes the presence of a person behind the wheel useless. The fact that the car giant General Motors has a stake in Lyft also reduces the chances that automakers will seek to carpool centrally and instead build partnerships with industry leaders.
The ups and downs of Lyft during its first week of trading make the headlines, but in the context of investing in the company, they are irrelevant. It will take years to judge the true success of Lyft, and it could take a form that no one can even predict at the moment.
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