Tech IPOs in 2019
Last year was an anomaly in that there were few major tech initial public offerings (IPOs) worth getting riled up about. Snap Inc (NYSE:SNAP) was perhaps the last major tech IPO, and that took place in 2017 (and was very disappointing).
Enter Lyft. The ride-sharing giant finally released some hard numbers regarding its IPO. More importantly, the Lyft IPO seems closer than ever, and I believe that investors will be able to see big gains when its stock goes public in one of the biggest tech IPOs in 2019.
My track record on predicting major tech IPOs in the recent past is pretty good; I rightly called that SNAP stock would be a stinker, and I’ve been validated. Two years out of the Snap IPO, the stock has fallen nearly 37%.
The Lyft IPO, on the other hand, has the potential to be one of the strongest tech IPOs in 2019. The reason for this is simple: people like ride-sharing apps, and there’s only really one other major competitor out there right now in most markets (more on that later).
With that in mind, I believe that investors could see strong early gains from Lyft stock when it does go public. Longer-term is harder to judge as we’ll have to factor in a good many variables that we’ll delve into later in this piece. For now, there’s a good chance that the Lyft IPO will come out of the gate with big gains as one of the strongest tech IPOs in 2019.
The reason I believe that the Lyft IPO could be among the best tech IPOs in 2019 is simple: it has the first-mover advantage.
This is the first time that a ride-sharing app has gone public. Considering how many people have replaced traditional transportation with these apps, it’s easy to project a huge amount of frothy interest in Lyft stock.
So the initial interest in the stock is definitely present. This is a very popular app with tons of room for growth yet remaining. At first blush, it has all the fundamental aspects that will support investor interest at the outset.
Now onto the hard numbers. Lyft is seeking to raise about $2.1 billion in its initial public offering, valuing the firm at almost $20.0 billion. (Source: “Lyft Aims for Valuation Near $20 Billion in Biggest U.S. IPO,” Bloomberg, March 18, 2019.)
Lyft is offering 30.8 million shares at $62.00 to $68.00 each, it said in a regulatory filing Monday. The company’s valuation, when all is said and done, will likely fall into the $21.0 billion-to-$23.0-billion range.
That’s a big ask, and a valuation that high hasn’t been seen since Snap, which could dissuade investors, considering how poorly Snap did.
While the two aren’t related in the slightest in terms of service, they are related in that they are both app IPOs that wary investors could peg as overvalued.
But here’s the key difference: Lyft actually has room to grow.
Unlike Snap, which was sold based on growth alone (and couldn’t deliver because so many other social media apps had crowded into the space), Lyft is a service that is growing in popularity across the world and faces relatively few challengers—save the big one, Uber Technologies, Inc.
As such, it has free reign to grow and expand globally, offering stiff competition for Uber.
And we’ve already seen its prowess develop year to year. The company released its first ever internal market share numbers, and they were impressive: Lyft claimed at the time to have a 35% national ride-sharing market, up from 20% in the previous 18 months, tallying a growth of 75%. (Source: “Lyft claims it now has more than one-third of the US ride-sharing market,” CNBC, May 14, 2018.)
While those numbers were somewhat in dispute (some place it closer to a 70/30 split favoring Uber), the ultimate takeaway is that Lyft is growing.
Across the globe, Lyft is also looking to expand into Uber’s markets and help drive competition in the space, something that consumers will almost certainly benefit from and will also help drive interest in Lyft stock.
On top of that, Lyft has made savvy business moves that have helped put it ahead of Uber in several key areas.
First, it made the smart move of…not being Uber. The original ride-sharing app has had scandal after scandal among its leadership and its drivers, tarnishing the brand and driving some to delete their app for good in favor of Lyft.
By simply avoiding those pitfalls, Lyft is already ahead in the public image game.
Then you have the company’s smart expansion into biking. While both Uber and Lyft are looking into bike-sharing as an expansion of their respective businesses, Lyft scored a big win when it acquired North America’s largest bike-sharing operator, Motivate. (Source: “Lyft Bets Big on Bikes in NYC, and Uber Is None Too Happy,” Wired, November 29, 2018.)
Lyft now dominates the bike-sharing business in several key markets, including major hubs like New York City and Chicago.
And another major battle the company is fighting with Uber involves self-driving cars. After all, if the company can get on the forefront of autonomous cabs, then it will dramatically reduce its expenses, increasing net revenue.
Lyft again scored a win here by partnering with Waymo LLC, the autonomous vehicle division of Alphabet Inc (NASDAQ:GOOGL). Alphabet, you’ll remember is the parent company of Google. (Source: “Lyft and Waymo Reach Deal to Collaborate on Self-Driving Cars,” The New York Times, May 14, 2017.)
With the power and resources of one of the largest tech companies in the world, there’s a very real possibility that Lyft could come out on top in the battle for autonomous vehicle supremacy.
In the court of public opinion, Lyft has already won; an experimental Uber vehicle that was being controlled autonomously killed a pedestrian in Arizona, sparking debate. (Source: “Why Uber’s self-driving car killed a pedestrian,” The Economist, May 29, 2018.)
So things are looking very good for Lyft moving forward. It has innovation, ambition, and savvy expansion going for it, making it a very strong company from a fundamentals standpoint.
Combine all this with very strong numbers—the company nearly doubled its revenue in 2018 while reducing its relative losses—and you have one of the strongest tech IPOs in 2019 that could see big gains on the horizon. (Source: “Lyft Fills In Some Blanks, But Not the Big One,” Bloomberg, March 18, 2019.)
Now the not-so-good news.
The first major stumbling block for the Lyft IPO is the company’s division of shares. Its founders are being granted special class stocks that will give them 20-1 voting power, essentially giving them near 50% ownership and a veto on most corporate decisions.
That’s not necessarily a bad thing, but does put a lot of power in the hands of founders, who can—at times—be headstrong and make willful decisions that may benefit their “vision” over stock value. It’s not a major risk, but it is there.
The company also has marked high losses, reaching $270.0 million by the end of 2018.
While that is no surprise (high losses are commonplace among startup tech companies prioritizing growth), there’s always the risk that it won’t be able to close that gap for many years to come—if ever.
I do believe there is a path to profitability for Lyft, but investors need to be aware of the potential risk that startup tech companies with such big losses on the books carry.
And finally, there’s the biggest risk of all: Uber.
Uber IPO vs Lyft IPO
The elephant in the room is indeed massive; Uber is looking to go public with a valuation of $120.0 billion, it has been reported. (Source: “Uber plans to kick off IPO in April,” VentureBeat, March 14, 2019.)
Compare that to the relatively paltry $2.0 billion of Lyft and it’s not hard to envision a scenario where the Uber IPO simply overshadows the Lyft IPO.
The Uber IPO will certainly be one of the biggest tech IPOs in 2019—likely the biggest—and may suck all the oxygen out of the market when it lands.
The concern, then, is that even in the event of a successful Lyft IPO, investors will jump ship to the more powerful and impressive (size-wise, anyways) Uber.
That is a real problem that could drain some of the enthusiasm for Lyft stock long-term.
The final issue is that, at the moment, Uber is expanding into markets that Lyft isn’t, like freight shipping. That could make Uber seem like the more attractive of the two.
After all, being able to replace truckers with autonomous vehicles would balloon Uber profits instantly should laws and technology allow it to happen in the near future.
But, again, Lyft is ahead of the game in several key aspects.
It hasn’t made nearly as many missteps as Uber on the public image front.
Furthermore, Uber’s massive valuation could spark a backlash among investors who view the company as grossly overvalued. In such an event, Lyft stock will shine all the brighter by comparison.
Still, overall, I do believe there is room enough for two ride-sharing apps on the market, even if I project that the early aftermath of an Uber IPO would be damaging to Lyft stock.
With the Lyft IPO fast approaching, the first major tech IPO in 2019 is likely to see strong gains out the gate.
While the future is uncertain for Lyft stock, I do believe that the company has the ability to be a strong stock moving forward. It’s a riskier pick for long-term strategies, but it has all the tools to spark growth moving forward.