Lyft IPO– Foot shot.

Lyft is giving away an edge by going public.

• I continue to think that Lyft is shooting itself in the foot by going public, as I continue to think that the company is not ready for the harsh glare of the public market and it is giving away a big edge that it could have had over Uber.
• Lyft is expecting to list its shares in the US this week and thanks to strong demand (fear of missing out), it has lifted the price range to $70 – $72 per share from $62 – $68 giving a valuation of $24.3bn at $72 per share.
• This is not far off 10x 2018 revenues and is asking a lot of investors in my opinion.
• This is because although Lyft has come to scale reporting $2.1bn in revenues in 2018 on transaction value of over $8bn, it is still unable to make any money.
• Growth is beginning to slow and operating leverage has yet to have much effect on financial performance.
• Gross margins are going in the right direction, but I think that to look at gross margins as reported is misleading.
• This is because gross margin should reflect the cost of getting a product out of the door and in Lyft’s case, this should include rider and driver incentives as well as refunds and.
• This is currently hidden in sales and marketing which in 2018 was still a massive 37% of turnover.
• If I include sales in marketing in gross costs, then gross margins fall to a pathetic 5%.
• While this is clearly overkill, I think that it is more representative of the operating situation that Lyft finds itself in which is going to cause problems further down the line.
• This situation is the fight to the death in which it is engaged with Uber and being a public company while this is going on is a really bad idea.
• This is because, with a valuation of 10x revenues, there is very little leeway for the company to miss expectations without taking a big hit to the share price.
• As Nokia, Snap, Razer and many other technology companies before it have found, a big hit the share price can cause a loss of confidence in the product triggering a vicious death spiral.
• This ties the hands of the management in terms of the actions it can take and will make it harder to be nimble, flexible and to compete against Uber.
• This is why I have long believed that Uber being forced to go public by Softbank was yet another gift from Uber following on from the space that Uber gave Lyft in 2017 when it was in disarray (see here).
• In my opinion, not taking advantage of this gift is a major mistake and given the valuation and the outlook for Lyft, one that it will come to regret.
• Uber still has the upper hand here as it remains much bigger, but I think that both of these IPOs will go badly as a result of neither company being ready to deal with intense public scrutiny.
• I have no fear of missing out.