Do You Bet on Money-Loser A (Lyft Stock) or Money-Loser B (Uber)?

Lyft stock - Do You Bet on Money-Loser A (Lyft Stock) or Money-Loser B (Uber)?

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Lyft (NASDAQ:LYFT) went public on March 28 at $72 a share giving the ride-sharing app a market cap of $20.6 billion right out of the gate. In the two weeks since LYFT stock has lost 18% of its IPO valuation. 

Now, Uber has filed its preliminary prospectus and looks to go public in May.

Investors are left pondering which money-losing company to own; Uber, the market-share leader, or Lyft, the competitor nipping at its heels.

Here’s a clue: Do nothing! Buy neither. Invest in stocks that make money.

Recent Experience

Last weekend, my family gathered in Toronto to celebrate my mom’s 85th birthday. Because there was going to be a bunch of us, we rented a condo downtown so we’d be close to the action. Uber was our ride of choice.

Having lived in Toronto until February 2018, I was well aware of the ride-sharing app. My wife and I used it all the time. Then I moved to Halifax and, boy, do I miss it. My sister lives in Victoria, and before that Vancouver. Neither place has Uber. In one weekend, she’s become a fan.

Who’s going to drive and treat their car more carefully than the actual owner? Most of the cabs I get into in Halifax smell like someone’s been sleeping in the back seat. No thanks.

Lyft and Uber, they both make sense in a world where most taxi drivers hate their job. Sure, there are lots of stories about assaults, fake drivers, etc., and the companies must be held to account for these incidents, but there’s no denying the concept itself is a good one.

A Slight Financial Problem

I could swear people who buy IPOs like Lyft or Uber imagine themselves to be part-time venture capitalists. As if their ownership stake is going to make all the difference in the companies making money.

I don’t need even two hands to count the number of money-losing stocks I’ve recommended to readers over the years. I’d have to think about it to come up with the actual names: Tesla (NASDAQ:TSLA) and Roku (NASDAQ:ROKU) are two. After that, it gets difficult, but I’m sure there’s a few that will come to me.

Anyway, I don’t believe regular investors who work in a job unrelated to finance, should be putting their hard-earned pay to money losers. The whole point of the stock market is to provide individuals with the opportunity to own profitable companies that are growing. A small piece of a bigger pie, if you will.

It isn’t for speculating on how big Lyft and Uber can become.

As it stands right now, Lyft and Uber are exceptionally good at losing money, it’s part of their unicorn DNA. By buying shares of either company’s IPO, you’re merely helping professional venture capitalists exit their investments.

There are exceptions where early-stage investors hang on to their shares for an extended period after going public, but those are few and far between.

If it were up to me, companies wouldn’t be allowed to go public without GAAP profitability in the latest fiscal year. Leave the money-losing growth phase to private companies.

I get that my idea defeats the point of raising capital on a public market, but if the SEC were really about protecting investors, they’d heed my words.

$3.7 Billion in Operating Losses and Counting

In fiscal 2018, Lyft and Uber had operating losses of $688 million and $3.0 billion, respectively. That’s an operating margin of -27%. Both prospectuses state that they may never make money. Ever.

That would be like someone telling you that the house that you’re about to buy from them is never going to appreciate. If you knew this, there is no way you’d buy it.

Yet folks are lining up to buy the IPO shares.

It’s nuts.

While the number of stocks listed on U.S. stock exchanges is shrinking — falling from 7,300 in 1996 to 3,600 in 2016 — there are still a large number of options available to investors. Many of them making money.

Bottom Line on Lyft Stock

Recently, I poo-pooed the Levi Strauss (NYSE:LEVI) IPO, offering readers with seven reasons why I wouldn’t touch it. Losing money wasn’t one of them. Up 36% since March 20, investors who did buy shares get the last laugh. For now. I still believe its upside isn’t nearly as rosy as analysts feel it is, but at least it makes money.

Buy those kinds of IPOs.

Unless you have a fun fund, don’t buy the Lyft or Uber kind. The wait for profitability will kill you.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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