Lyft (NASDAQ:LYFT) is the first of the mega-unicorn companies to come to the public market. In fact, it was the first initial public offering (IPO) of this year. After a horrendous and 2018, the IPO market was frozen until it broke ground late March.
A unicorn is a startup that is worth over a billion dollars and LYFT is part of a small club of them that are now “deca-unicorns,” which means that they are worth over $10 billion.
The expert opinions in the media are aplenty on the subject. There are critics and fans of how they priced the IPO, of how many slices of the pie there were and where the controlling votes lie. But really, since this is the first of its kind to come to market, there are no real experts.
The company came to market and the LYFT stock price soared out of the gate. Since then it has disappointed the buyers as it still lingers 15% below the first day high. Late last week it showed some strength but it has yet to burst higher.
The consensus is that the issuing banks botched the IPO process, so the shorts are leaning into Lyft shares already. The fears are justified as there are still issues that linger that could threaten the stock even further. Earnings and lockup expiration are the two major ones.
LYFT options contracts are now available and I tested the waters last week. I got lucky buying LYFT calls early and scalped a fast profit already. So now I come into making the decision of whether it’s a good idea to own the stock for the long haul.
Again, there are no experts but we will soon have more data to educate ourselves on what lies ahead for LYFT stock. Management will soon report earnings and some of the mysteries will reveal themselves. Then the forensic accountants and the stock experts will opine, so we can all eliminate some of the guesswork.
Meanwhile, there are facts that we already know. LYFT burns billions of dollars in cash as it tries to maintain an exponential growth trajectory. We also know that they serve a gargantuan market. So far they have concentrated on the U.S. part of it, but eventually, they will need to expand and eat into their major competitor Uber. Also like Uber, LYFT will need to diversify its income and find new venues that are not specific to passenger delivery.
Meanwhile therein lies the opportunity. The possibilities are endless for LYFT so are the fears overblown here?
From a tactical perspective, it would be worth it to take a starter position ahead of the earnings. There is a realistic possibility that the selloff from the IPO in Lyft stock has already priced in the worst case scenario for their first report card. So when it actually comes out, the stock could have a relief pop on the headline.
I consider this to be a medium conviction trade because it is tactical more so than fundamental as we lack the data necessary to actually value the stock. Therefore the size of the position should be relatively small. This would leave room to add to it to average down into it or just book the loss after if the information is bad. It just leaves some chips in the pockets rather than go all in right away on a binary event.
Since the options became available so quickly on LYFT stock, it would be smarter to use those as a way to bet on the stock’s first earnings report. There are hundreds of ways of using options where I can risk less to participate.
The two most popular ones are buying upside calls, or spreads, to participate with a rally, or selling downside puts in order to get long the stock at a certain price. Either way, it would be the equivalent of buying the stock only without risking as much out of pocket money. The downside of using options, of course, is the time. All options contracts have finite time limits so unlike owning the stock itself, the asset expires.
Bottom Line on Lyft Stock
Risking a fortune on LYFT here is a gamble. Aside from its own problems, there are other risks looming. For instance, a slew of upcoming high-profile IPOs will take away bids from LYFT. This includes Uber, which is the Goliath of them all. This could be even more reason why I would use options versus using the stock itself …
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
