The financial market media was obsessed with the Lyft (NASDAQ:LYFT) IPO on Friday. But regardless of the excitement surrounding the first public ridesharing company, investors should definitely keep their distance from LYFT stock.
Lyft investors got a big bump on Friday when the stock traded up by 8.7% on the day. However, troubling fundamental trends, bearish IPO market dynamics and a history of poor outcomes from overhyped IPOs are all working against LYFT stock in the near term.
History Is Not On The Side Of LYFT Stock
The Lyft IPO is the largest and most highly anticipated tech IPO in recent memory. But the more the Wall Street media is whipped into a frenzy over a stock, the more careful investors should be. Unfortunately, there’s a long history of tech IPO bloodbaths to keep in mind.
The best recent example of similar behavior is the Snap (NYSE:SNAP) IPO back in 2017. At the time, SNAP stock opened its first day of trading up 40% from its $17 IPO price and then traded higher by another 10% on day-two. At the time, I warned investors.
Of course, the market enthusiasm died off quickly. More than two years later, the stock is now trading at under $11.
While SNAP stock hasn’t recovered from its first-year selloff, even successful tech IPOs struggled when they first hit the market. Alibaba (NYSE:BABA) and Facebook (NASDAQ:FB) ultimately ended up being huge winners for long-term investors that bought when the stocks first hit the market. However, six months after their first days of trading, FB stock and BABA stock were down 38.4% and 12.8%, respectively.
While Lyft bulls can argue that these examples are anecdotal, there are plenty more. In fact, eight of the 10 largest tech IPOs in history traded lower by between 25% and 71% in the year after their first day of trading.
Look Out For Lockup
One of the biggest reasons why these huge tech IPOs struggle in their first year is because of concerns over insider selling. When a company like Lyft first hits the public market, it’s a big moment for the company’s brand. When the media spotlight is brightest, the last thing companies want is for a stock’s share price to tank because insiders are cashing out of their holdings. To prevent that phenomenon from happening, companies implement “lockups” that prevent insiders from selling shares in the public market for a certain amount of time. Lockup periods typically expire three to six months after the IPO date. After lockup expiration, insiders can sell shares at will.
Most IPO insiders don’t simply dump their shares as soon as they can. But many tech startups like Lyft have relatively young insiders in their 20s and 30s. It’s a tall order to convince someone in his or her 20s not to take any profits in a stake worth $5 or $10 million dollars. The temptation to become an instant millionaire is simply too much, even if they believe in the company’s ultimate success.
Lyft’s lockup period is 180 days, so investors will be watching for potential heavy insider selling at around the end of June.
LYFT Stock May Be Overpriced
The most important reason to stay away from LYFT stock is that it may not be a good investment to begin with.
Lyft bulls point to the company’s 100% revenue growth in 2018. Lyft has also increased its ridesharing market share from 22% in 2017 to 39% today, according to D.A. Davidson.
However, revenue growth has dropped from 220% in 2017 to 100% in 2018. D.A. Davidson projects that growth rate will continue to fall to 56% in 2019 and 30% in 2020. While revenue growth is declining sharply, losses are growing steeply. Lyft’s S-1 filing revealed a $687 million loss in 2017 and a $911 million loss in 2018. Declining revenue growth and accelerating earnings losses are not a winning combo.
Even legendary value investor Warren Buffett warned investors about Lyft this week. “I think buying new offerings during hot periods in the market … I don’t think it’s anything the average person should think about at all,” Buffett said in an interview with CNBC.
The Bottom Line
Lyft may end up being a big hit in its first year of trading. But tech companies like Lyft are no fools. They often go public at the most opportune time they can to maximize market returns for their insider investors.
With so much noise associated with the first year of trading, buying a red-hot IPO like Lyft is a gamble at best.
“You can go around making dumb bets and win … It’s not something you want to take as a lifetime policy, though,” Buffett said this week.
If you are one of the investors who think that Lyft will be a long-term winner like Netflix (NASDAQ:NFLX) or Amazon (NASDAQ:AMZN), be patient. There’s nothing wrong with waiting a year to let all the dust settle on the stock before you buy. Sure, you might miss out on some big gains. But even investors who missed out on the first year of owning AMZN or NFLX stock are filthy rich at this point. Buying LYFT stock now is simply not worth the risk.
As of this writing, Wayne Duggan was long BABA.