Is the Lyft IPO Overpriced?

Lyft is one of the most famous tech unicorns in the world. There was tremendous amount of buzz in the market regarding the Lyft IPO. This is the reason that the company has been able to garner a valuation of close to $24 billion. This astronomical valuation is despite the fact that the company has announced that it recorded a loss of over $900 million in the last year. Lyft has never ever recorded a profit in its history. During 2018, the company generated a negative cash flow of $350 million. These facts have not stopped hordes of investors who are queuing up to buy shares of Lyft hoping that it will be the next Apple or Microsoft.

Since the financials of Lyft are pretty unimpressive when viewed from a traditional standpoint, many critics don’t agree to this standpoint. In fact, they believe quite the opposite. They believe that the Lyft IPO is horribly overvalued. In this article, we will have a look at some of the arguments which support the notion that Lyft is overpriced.

Lyft Has No Unique Value Proposition

Many investors believe that Lyft is overpriced because the company does not have any unique value proposition. There is literally no difference between the service it provides and Uber does. Hence, over the long run, there is no reason why customers would be loyal to Lyft.

The problem with the lack of competitive differentiation is that it leads to price wars. In case of companies like Uber and Lyft, they are already in the middle of a price war. Both companies are losing money because of a lack of pricing power. It is unlikely that this situation will change anytime in the near future. Hence, the negative cash flows may not be transient. Rather, they may be a permanent feature of this company which is what makes it a bad bet for the value conscious investors.

Conservative investors do not see any way in which the company will be able to turn around this situation. Hence, they believe that the game will last only as long as the finding keeps coming. They don’t want to be the people left holding the bad when the music stops!

The IPO Is An Exit For Strategic Investors

Naive retail investors are buying into the hype that investment bankers are creating. Many investors really believe that they are getting in on the ground floor of a major tech company. They believe that Lyft will turn out to be the next Apple or Microsoft and the value of their investments will skyrocket.

However, nothing could be farther from the truth. The reality is that most retail investors are not getting in on the ground floor. Instead, they are an exit option for the investors that actually got in on the ground floor.

There is a lot of difference in the way in which companies like Apple and Microsoft grew and the way in which Lyft is growing. Apple and Microsoft had to list very early in order to raise capital. Most investors had not heard the name of these companies when they listed on the exchange. However, Lyft is already a very popular company. It has not listed on the exchange because until now it has already raised huge sums of money from the very well developed venture capital market.

Hence, the venture capital investors are the people who actually got in on the ground floor. The investors who are buying Lyft shares now are providing an exit route to these strategic investors. When it comes to investing, the rule is pretty simple. “If it is famous, it’s probably not a hidden gem.”

Empirical Evidence

Investors who are hung up on the Microsoft or the Apple story suffer from hindsight bias. This means that they look in the rear view mirror and believe that Microsoft and Apple were easy to spot. The reality is that these were not the only tech companies that listed during the time. There are many others life Pets.com which did not make any money for the investors. eBay and Amazon were considered to be two of the hottest tech start-ups of their time. Both of them were considered to be equals. However, now about 15 years later, Amazon is at least ten times the size of eBay. The reality is that there is very little information which would have enabled an investor to differentiate between an Amazon and an eBay.

The record of empirical evidence is crystal clear. Tech companies are also like other companies. This means that they also face the same odds of failure. Hence, it would be fair to say that the odds are stacked against Lyft.

Labour Issues

Both Uber and Lyft use a legal loophole which allows them to list drivers as contractors and not as employees. This loophole helps these companies save a lot of money as they do not have to pay benefits or even minimum wage to the drivers. This leaves a handful of investors and employees to split $24 billion whereas the thousands of drivers that these companies have are marginalized. This is unlikely to go on for long. It is only a matter of time before regulators around the world take serious note of this irregularity and enforce labour laws. If this happens, the company’s business model will become unviable overnight.

The bottom line is that investors are not really sure whether companies like Lyft and Uber are unviable businesses. Some believe that these companies have so much funding that they only think about the long term and ignore near term cash burn. This debate is likely to continue for some time and the share price of Lyft shares will be the best barometer to gauge which group of investors is winning.