There’s a magical unicorn coming our way, and we’re being offered a ride high into profitable skies if we grab its horn and jump on.
At least that’s what Lyft’s IPO bankers and early investors want us to believe.
The truth is there’s no such thing as a unicorn in real life (in business, a unicorn is a private company that investors claim is worth more than $1 billion), and Lyft isn’t any kind of highflying substitute.
What the upcoming Lyft IPO is more likely to be is a fat payday for bankers, underwriters, and especially early investors, and a bucking-off of late-to-the-party IPO share buyers.
Maybe Unicorns Do Exist
An IPO (initial public offering) is two things:
First and foremost, an IPO is a real-life monetization of founders’ and early investors’ investment and an exit strategy for them.
Real-life monetization means there’s no more theoretical posturing about what the shares and valuation of the formerly private entity are worth. After the company’s public shares are priced in real time in the real world and after restrictions, founders and investors can sell their shares.
Of course, they hope to sell them at the IPO price, or a lot higher, if and when they sell some or all of their stakes.
Even if early investors don’t sell their newly liquid shares, they get to “mark” their investments at the new, presumably much higher valuation an IPO affords them.
For example, if shares in the Lyft IPO are priced and trade around $68 (one estimate of the IPO’s debut), Fidelity Investments, which invested about $800 million in Lyft ($600 million of that last year, which helped give the company a valuation of $15.1 billion) would see the valuation of Lyft jump to $23 billion (at $68 a share).
That allows Fidelity to mark the value of its $600 million stake 52% higher, a super gain in only a year.
Fidelity’s other $200 million investment, made when Lyft had a much lower valuation, will have an exponentially higher gain after the IPO.
Whether or not founders and early investors sell newly minted shares, they reap the rewards of extraordinary paper wealth.
The other reason to go public is to raise additional capital for the business, for a host of purposes.
I’ll come back to how much capital Lyft hopes to raise and what they’re going to do with it, but there’s more you need to know about Lyft’s unicorn valuation and the IPO.
Lyft has had $5.1 billion plowed into it since it was founded in June 2012.
The way private company “valuation” works is more theoretical (I call it magical) than realistic.
It’s not based on sales, profits, or metrics that public company investors and analysts rely on. Rather, it’s based on the next round of money invested into the company.
In Lyft’s case, in 2017, after several rounds of investments made their way into the company, theoretically Lyft had a valuation of $7.5 billion.
Then magically in 2018, when Fidelity Investments put in $600 million, Lyft, based on the number of shares Fidelity got for its last round investment, was valued at $15.1 billion.
That’s a magical 101% increase in valuation in a year.
Maybe unicorns do exist.
Not Worth the Ride
If the Lyft IPO sees shares trade at $68, based on the number of shares Lyft will have outstanding, its valuation will be close to $23 billion.
That’s a real valuation based on free-market trading of Lyft’s shares, not a theoretical valuation.
Does going public justify an increase in the valuation of Lyft of more than 50%, in less than a year?
Not in my book.
Sure, Lyft’s had tremendous growth. With estimates of 10 million rides a week, it’s sneaking up on chief rival Uber. And while Uber’s international, Lyft is just in the U.S. and Canada – but it has plenty of room to grow, no matter what the cost of that growth might be.
But, Lyft’s already expensive.
According to a Forbes analysis, Lyft in 2018 had net revenue of $1.5 billion (not profits). Applying its 2018 valuation of $15.1 billion means it’s trading at a price-earnings (PE) multiple of 10x. Uber, based on its 2017 valuation of $48 billion and its net revenue, was trading last year at a PE of 4.5x.
Lyft has never made a profit.
Last year, the company had a net loss of $911.3 million. That’s a 32% bigger loss than the $688.3 million Lyft lost in 2017.
Maybe the ride-sharing business isn’t all it’s cracked up to be. Maybe that’s why Lyft and Uber are spending tons of money on other ventures, like self-driving cars, renting scooters and bicycles, and other “ride-sharing” ventures.
Lyft expects to raise $2 billion from its IPO. That’s a lot of money to be able to invest or cover losses.
How they spend it, what they spend it on and how fast they spend it will make a huge difference in how Lyft is valued a year from now.
I love the service. It’s just too bad they can’t make a profit from it.
Can they make their core business profitable?
Can they endeavor successfully down a bunch of other paths where there’s tons of competition who have much deeper pockets than Lyft?
That remains to be seen.
As far as I can see, Lyft’s losses and its magical valuation jumps don’t make its IPO a ride worth sharing.
But that doesn’t mean that all IPOs aren’t worth it.
In fact, there’s a new wave of privately held companies that could IPO as early as April 15, each with the potential for multiple billions of dollars.
And these tiny grubstakes could make everyday people into millionaires practically overnight.
The trend is only accelerating, so before this opportunity slips away, click here to learn more.