With Uber’s IPO Just Weeks Away, What Should Investors Do With Lyft Stock?

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Uber is kicking off its IPO roadshow, indicating that its shares should start trading in early May. Those involved in the deal say the ride-sharing unicorn looking for a $80 billion to $90 billion valuation, which would price the shares between $44 and $50 per share, and raising around $8 billion to $9 billion. This valuation range is a bit of a setback. Earlier, bankers hoped to usher the deal out closer to a $120 billion valuation.

With Uber's IPO Just Weeks Away, What Should Investors Do With Lyft Stock?
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So, what’s one big reason for Uber’s softer IPO launch?

It could be that Lyft‘s (NASDAQ:LYFT) underwhelming post-IPO performance has cast a shadow on Uber. Lyft stock has lost almost 15% since its March 29 IPO, compared to a 1.7% increase in the S&P 500 index.

Still, It’s rare when the two leading companies in an industry both debut at the same time. This most interesting dynamic could lead to a rebound in LYFT stock fairly soon.

Anticipation Stokes Lyft Selling Pressure

Let’s think about the situation with LYFT stock and Uber for a minute. For an analogy, imagine that Apple (NASDAQ:AAPL) had spun off Apple Music and listed it to the public just a month before Spotify (NYSE:SPOT) was going to list. Trading in Apple Music would be heavily influenced by the fact that its bigger rival was about to launch. How would this play out in practice?

Imagine being an Uber insider now. You own a ton of stock that you likely have huge gains on but can’t trade. There’s a good chance that you can’t trade much at the IPO, either, and have to wait for the lock-up period to expire. That probably feels like a lifetime away.

The Lyft IPO offered Uber insiders a fantastic opportunity. Now they could short Lyft, and essentially lock in gains on Uber. It wouldn’t be an exact hedge, but it’d be pretty close. Valuations for the two should track each other in the short-term. Thus, it’d be no surprise if a ton of folks with financial interests in Uber stock are trading Lyft stock now. That has likely created a lot of downward pressure on Lyft.

Now that the market has listed LYFT stock options, this makes it even easier for Uber folks to bet against Lyft as they can just buy puts, rather than worrying about a naked short position.

Enter a Short Squeeze

Interestingly, once Uber lists, and especially once Uber’s lockup period ends, expect this to create upward pressure on Lyft’s stock. Over time, Uber insiders can cash out of their stock while closing their short positions in Lyft. You’ll also see long/short funds and other such money start pricing Lyft against Uber on comparable metrics such as price/sales.

There’s also the matter that Lyft stock fundamentally can’t drop too far now, because it could ruin Uber’s IPO. In the run-up to Uber’s IPO, it’s no surprise that the stock is seeing frenetic trading action. You have huge short selling, but also institutions wanting to support the stock enough that Uber’s IPO goes off and the banks get paid their fat fees.

Add in that Lyft stock has already accumulated huge short interest (both from Uber folks and also bears who hate unprofitable companies) and the potential for short squeezes and other market antics is elevated. Incredibly enough, in just the first week of trading, LYFT stock already hit an astronomical 41% of the float being short as it plunged from the opening $87 print. This huge level of negativity will lead to buying at some point as the bears take profits. Due the variety of dynamics at work, expect vigorous trading in LYFT stock right around the Uber IPO launch.

An Amateur Short

Well-known short seller Andrew Left — aka Citron Research — published a report following the IPO suggesting that Lyft is an “amateur short” position that smarter investors should avoid. Citron, as one of the internet’s first notable short sellers — they’ve been at it since 2000 — have made a bazillion calls over the years, almost all of them bearish. So it’s interesting when they endorse a stock.

Their report starts by saying that: “Shorting disruptive companies that dominate a megatrend simply because they lose money is a sure way to go broke.” Citron notes that when they have made bad short calls, it comes from these sorts of stocks. Citron further suggests that bears have been run over shorting companies with huge potential markets like Netflix (NASDAQ:NFLX) and Square (NYSE:SQ) which also had less than sterling financials early on in their publicly traded lives.

Citron goes on to offer five bullet points on why Lyft stock will keep rising after its IPO. Some of these are common sense, but still worth considering. For example, Lyft has grown ridership 400% over the past three years, and is still growing at a far faster rate than Uber (off a way smaller base, to be fair). That said, anything that can grow 400% in a few years will attract a certain class of investors.

Citron also notes that ride sharing still has a long growth trajectory, accounting for just 1% of passenger miles in the U.S. I agree with him here as well. I think many older investors underestimate this factor. Younger folks are having a fundamentally different experience with vehicles, especially if we’ve lived in big cities for most of our adult lives. LYFT stock can capitalize on this.

LYFT Stock Offers a Decent Trade Set-Up

Don’t mistake this article for me being exceptionally bullish on LYFT stock for the long haul. The company is losing loads of money. And I prefer Uber’s competitive position, as it is both better-funded and has more attractive positions in dozens of overseas markets. Lyft is way behind on that front.

However, as a short-term trade, there’s a ton to like about LYFT stock right now. The short interest is through the roof. LYFT stock is trading way down from the IPO price of $72, let alone the $87 opening print. When most folks are leaning one way, the contrarian trader takes the opposite position. Expect fireworks once Uber’s IPO hits, and it could result in a major move up for LYFT stock.

At the time of this writing, Ian Bezek held no position in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2019/05/with-ubers-ipo-just-weeks-away-what-should-investors-do-with-lyft-stock/.

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