It’s easy to fall in love with Silicon Valley’s billion-dollar startups, getting caught up in stories of innovation and disruption, but beware and watch where you put your money as these tech savvy companies begin trading on Wall Street.
March 29thmarked the celebration of Lyft announcing its IPO (initial public offering) as tech mogul Logan Green, CEO of Lyft, rang the Nasdaq opening bell. Starting at $72 a share, the company topped its evaluation at 24 billion, a price many investors seemed very skeptical about; and for good reason. After just one day on the market, Lyft’s stock price dropped 12% causing havoc with young, eager investors.
“The perfect IPO,” quoted Tom Farley, ex-president of the New York Stock Exchange one day before the IPO. But why wasn’t Lyft the perfect IPO? In a time of innovation, automation, and apps consuming our lives, many investors looked past some jaw-dropping statistics. While Lyft is growing at a fast pace, they are also losing money at that same rate. The California-based company has never recorded a profitable quarter and has deemed a loss of around $953,000,000 in 2018.
The once benefits of their operating platform are now drawbacks for their investors. With a simple tap of the home button users can switch between multiple different ridesharing applications. As Lyft has no control over their drivers, the company has a very unstable revenue stream that should deter many investors.
However, don’t let all this bad news steer you away quite yet. Since the dotcom bubble of 2000, over 90% of tech IPO’s have not seen profitable margins until after five years of being public. Bulls will argue that Lyft is still a good company to invest in, and it’s quite interesting why.
Being that Lyft relies heavily on their software, seeing Lyft show negative profits isn’t necessarily a horrible thing. With technology taking greater steps each day, Lyft has accumulated massive amounts of R&D expense (research and development) to fuel their research on self-driving vehicles; a potential future of both Lyft and their major competitor, Uber. With that said, their potential for profitability can be summed up by a simple ratio. With Lyft continually growing, the number of riders and drivers continue to grow as well. This is known as a “network effect”- giving the company a competitive advantage over new entrants. “A platform with more drivers gets more riders, and a platform with more riders gets more drivers,” states Forbes analyst David Trainer.
So, what does that mean for other unicorn companies looking to trot out their IPO in the near future? You may see Uber, Airbnb and Pinterest going public as early as late April and are looking to do so primarily for one reason. That is, investment. These companies feed off of investors dollars to further their technology and get a step ahead of their competition. Not only are these companies eager to go public, but investors are as well. Given the acronym LUPA in early 2019, many analysts believed these companies had the potential of making people millionaires; something that has done the opposite so far for Lyft stockholders. All in all, 2019 is bound to be a dramatic year for the stock market that may have investors deleting applications, or driving away with millions.