Lyft IPO Makes a Splash, Followed By a Flop

Despite playing host to what everyone presumed would be a very hot property, Lyft’s IPO hasn’t panned out as expected. While the company’s Friday stock debut was strong, April 1st was less promising, with Lyft’s share price slipping by nearly 12 percent in a single day. It’s now well beneath the target price, casting doubts about the financial sustainability of mobility firms.

It’s a complicated issue. Lyft was valued at more than $22 billion when it went public last week, but investors are concerned with the company’s inability to turn a profit. Last year, the ride-hailing giant posted a net loss of nearly $1 billion. With Uber likely to announce its own IPO soon (and likely face similar headwinds), many are concerned.

While the issue of profitability is an important one, it’s not the only reason the company is having trouble trading. Ride-hailing firms are no longer novel and people are starting to point out the downsides. Environmentalists and city planners are becoming increasingly concerned that the sudden influx of Uber and Lyft vehicles in urban areas have contributed to traffic congestion and pollution in a big way. Studies also indicate that these companies have syphoned many customers away from public transit.

However, that might also be ride-hailing firms’ biggest asset. Both Lyft and Uber are expanding rapidly and seeing more riders every single day. And all that growth has turned out to be expensive. Neither company has a clear path toward becoming profitable. While both have suggested deploying autonomous vehicles, reducing the need for independent contractors and their cars, development of the technology has proven extremely costly and not nearly as simple or swift as the automotive industry once predicted. As a result, public trust that AVs will be dependable, safe, and useful hasn’t improved much.

In the lead-up to Lyft’s IPO, many claimed companies of its ilk are severely overvalued, which isn’t terribly uncommon in the tech sector. But going public changed things. Rather than leaning on venture capital and positive press, Lyft is going to have to start appeasing its shareholders — which opens up a pandora’s box of issues. They’re going to be less willing to support the company if it continues losing money and, based on its long-term aspirations, losing money is likely to be par for the course for a while longer.

CNBC cited Michael Ward, an analyst at Seaport Global Securities, initiating coverage of the stock with a sell rating and a 12-month price target of just $42 a share. Lyft priced its IPO on Thursday evening at $72. Ward’s price target suggests a 39.1 percent reduction from Monday’s close of $69.

“In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service,” he said, adding that his personal belief is that people will continue to own cars and lean upon ride-sharing services as a “convenient supplement.”

“While we believe the ridesharing market will continue to grow and expect Lyft to be a prime competitor, in our view, current valuations reflect an overly optimistic view of consumer behavior in the U.S.,” Ward concluded.

Nobody really knows if Uber and Lyft will fizzle out, replace taxis entirely, or become so prevalent that they effectively replace public and personal transportation (doubtful). But many agree that both will have to adjust their pricing to become profitable — an interesting situation, considering their competitive cost and convenience are what gave them an edge over cabs, while helping the disruptive startups lure passengers away from trains and buses.

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