Thirteen days. That’s how long Lyft (NASDAQ:LYFT) was able to stave off its first lawsuit as a publicly-traded entity. The 20% tumble LYFT stock has taken since its IPO, of course, arguably accelerated the advent of the litigation.
On Wednesday, two separate class-action lawsuits were filed against ride-hailing company Lyft, on behalf of investors who claim the company’s pre-IPO disclosures exaggerated its market share. Both suits were filed in San Francisco, claiming the company exaggerated its market share within the nascent industry.
Each complaint also suggested the company willfully didn’t warn would-be investors that the electric bikes utilized as part of its bike-sharing service were on the verge of being recalled.
It’s not an auspicious start. It’s also anything but surprising.
The 39% market share Lyft said it had earned since starting operations in 2012 may or may not be an entirely accurate figure.
Number-crunching outfit Second Measure pegged the figure at 28.4% of the domestic ride-hailing market as of October of last year, when preparations for the public offering began in earnest. The company calculated rival Uber’s U.S. market share at 69.2%. The numbers were 30.3% and 67.3% as of February.
The overarching flaw in the legal argument: Second Measure’s figures may be tough to validate or verify. The company’s M.O. is to “ingest and analyze purchases from millions of anonymized U.S. shoppers to provide a clear and accurate view into any consumer company.”
In other words, Second Measure didn’t actually count each and every one of Lyft’s and Uber’s rides. The figures are estimates based on sampling of what’s still a very fuzzy arena.
The plaintiff’s attorneys may also face a tough time explaining why they ignored Second Measure’s comparable data through February, but chose to believe it rather than Lyft’s prospectus after the Lyft IPO was completed. In that vein, Lyft’s claim “Our U.S. ridesharing market share was 39% in December 2018, up from 22% in December 2016” is based on data from equally-credible data-analysis outfit Rakuten Intelligence.
As for the firm’s electric bicycles, as of the March 1st filing date for the disclosure document or even the March 28th launch of LYFT stock, the company may not have known. The bikes’ braking problems weren’t well known until April 14.
To that end, litigant investors may also face a challenge in convincing a judge or jury they were legitimately injured, given Lyft’s notice in its prospectus: “Revenue from our network of shared bikes and scooters was not material for the year ended December 31, 2018.”
Lyft Stock and an Investor Reality Check
The lawsuit isn’t really about market share or electric bicycles, of course. It’s about investors searching for a way to offset losses on a gamble that didn’t go as hoped.
It’s not the first time we’ve seen it. Roughly 12% of newly-IPO’d companies face a securities lawsuit within a year of going public, while almost one-fourth of new companies are sued within six years of their public offering.
Some familiar names have faced such legal hurdles too. Facebook (NASDAQ:FB), Blue Apron Holdings (NYSE:APRN) and Snap (NYSE:SNAP) are a small sampling of then-fresh IPOs that prompted shareholder lawsuits, spanning the entire spectrum of merit.
Facebook has gone on to become an incredibly rewarding investment, while Blue Apron remains a disaster. Snap is somewhere in between, offering some hope for a bright future, but not on solid footing just yet.
The disparate mix of outcomes just within that trio of companies verifies not all class action suits levied against new companies are merited.
They still materialize in a big way, however, because the world has become wildly litigious, and investors have allowed themselves to be lured into the hype created by the media, and created by the financial industry in general. Young companies actually have little to do with the hype effect.
Bottom Line for LYFT Stock
While the legal argument against Lyft is relatively poor and statistically likely to wind up as a settlement that costs the company less than it would to fight the matter in a courtroom.
That doesn’t inherently mean Lyft will eventually become profitable though, nor does it mean the bad publicity associated with the suit won’t weigh on an already struggling LYFT stock. It simply means that a group of investors, organized by some attorneys, are taking a no-cost shot at putting some money back in their accounts after suffering sizable early losses on a soured trade.
Whatever the case, no investor can afford forget that at the end of the day, everyone in the capital markets business is selling something.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.