The initial public offering (IPO) of Lyft (NASDAQ:LYFT) is reading like a classic venture capital “down round,” in which new capital is raised at valuations lower than in the previous round.
Shares that launched at over $83 each less than one month ago are trading at around $58 each on Monday. That’s a 30% haircut.
This doesn’t bode well for Uber Technologies, which issued its S-1 April 11 and is now trying to convince people its stock is worth buying. Uber’s most recent private capital raise was also a classic “down round,” with Softbank buying about 20% of existing equity at a valuation of $48 billion.
But things don’t have to be that way.
Why Zoom Zoomed
Zoom Video Communications (NASDAQ:ZM) broke fast out of the gates after listing shares at $36 each on April 18. They were trading at $65 on Monday.
Zoom’s S-1 showed it making money for the fiscal year ending in January, 3 cents per share on revenue of $330.5 million. The April 22 valuation of nearly $16 billion looks rich, but Zoom’s revenues more than doubled between 2018 and 2019, rising faster than expenses. If Zoom continues to grow, in other words, it should be a profit-making machine.
Zoom CEO Eric Yuan also provided an attractive cover story, that of a Chinese-born former Cisco Systems (NASDAQ:CSCO) engineer beating his former employer with a “freemium” model, built entirely in the cloud.
Before coming public, Zoom had just five funding rounds, the last bringing in $115 million. While videoconferencing is established as a technology, researchers see its growth continuing, approaching $14 billion in four years.
Why Lyft Failed
Lyft, by contrast, issued an S-1 that was big on promises, but even bigger on losses.
Like Zoom, its revenue doubled in the year before going public, but expenses nearly did too. The company reported a 2018 loss of $43.04 per share, on revenues of $2.16 billion after losing $35.53 per share on 2017 revenue of $1.06 billion, and $37.08 per share on revenue of $343 million the year before.
Lyft claimed a valuation of $11 billion when it raised $1 billion in cash late in 2017, raised capital twice more in 2018 and carried a market cap of under $16 billion early on April 22.
Ride-hailing is great in theory, but in practice it’s a taxi, one without a license beyond the driver’s license and organized online. That’s why Lyft is promoting other forms of mobility, without drivers, like scooters and bikes. That’s why Lyft bulls are talking about self-driving cars. The gig economy is not where you want to place your bets when unemployment is below 4%, and Lyft insists its drivers don’t really have jobs ,
The Bottom Line
There are two important lessons here for cloud investors.
First, you don’t want to buy something that doesn’t make money. Zoom makes money. Lyft does not make money.
Second, if you’re buying technology, it should be self-service. Zoom’s technology is self-service, and the price starts at free. Lyft technology is not self-service, even bikes have liability issues and its vision of making transportation “people-centric” is still vaporware.
Zoom went public, in other words, because it could offer public investors a good opportunity. Lyft went public because it had run out of private investors to fleece.
The short version is this. Buy Google, not Webvan.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.
