Shares of Lyft dropped 12% yesterday to $69.01 after closing at $78.29 on its first day of trading last Friday, proving once again that chasing “unicorns” is a risky business. As a general rule, I try to stay clear of IPOs, specially high-profile ones that are hyped up in the financial press. From a risk-return perspective I can see how it might make sense to buy into the hype, but you have to be fast and aggressive. You also have to know that after the initial pop there will be a cash out moment; insiders and traders will sell and the stock will nose dive. It’s happening right now to Lyft. Sometimes the stock recovers, but that depends on the outlook of each individual company.
In Lyft’s case, however, there are some fundamental questions to consider. Chief among them is the company’s ability to generate profits. Lyft doubled its revenue last year, but it also incurred loses of $911 million dollars. That’s a 30 percent increase from the previous year. And it’s not entirely clear how Lyft will reduce costs, or how it will compete against its larger rival, Uber (which is also going public later this year).
The entire ride-share sector actually baffles me. Lyft and Uber, for example, burn money like crazy. That’s because they are subsidizing our rides. The hope, of course, is that they will have enough market share to offset costs. But they were already running out of VC money, which is why they were forced to go public. Once this money is spent, they are going to have to raise the price of each ride. Lyft and Uber customers will finally have to pay the actual price of a ride. The big question, naturally, is how are customers going to react? Will demand drop? And how will this affect profits? It’s a lot to think about, which is why I’m staying clear of this sector. At least for now.