Lyft’s two-day performance offers a sobering lesson on the risks of jumping in on the opening trading day of a hot company.
”It’s a good example of why people should approach IPO investing cautiously,” said Kathleen Smith, a principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. “This company has large losses and will not be profitable in the near future.”
Lyft was a down note in an otherwise booming day for markets, thanks to an upbeat manufacturing report from China. The Dow Jones industrial average soared 329 points, up 1.27 percent, to close Monday at 26,258. The S&P 500 ended the day up 1.16 percent at 2,867. The Nasdaq Composite finished up 1.29 percent, closing at 7,828.
All three indexes followed one of the strongest first quarters in years.
“Investors likely concluded that since overly negative economic and earnings expectations had already been factored into share prices, they couldn’t hurt themselves falling out of a basement window,” said Sam Stovall of CFRA Research. “As a result, buying was triggered by better-than-expected economic data from China and the U.S.”
Lyft is the first in a wave of highly anticipated, so-called “unicorn” companies that are expected to hit the public markets this year. Uber Technologies, Pinterest, Slack, Airbnb and Palantir Technologies are among the big names being teed up to go public.
Both Lyft and Uber, two high-profile disrupter companies, have yet to make a profit. Lyft said in regulatory filings last week that it posted a $900 million loss last year. Money managers say it’s too early to know whether the ride-sharing companies will become great businesses — or not.
”Right now, there is a lot of exuberance and excitement,”said Nicole Tanenbaum, chief investment strategist at Chequers Financial Management. “But at the end of the day, you’re betting on the long-term profitability of these companies. The path to that profitability is still unclear. A lot of assumptions are being made. Sometimes it works out to be a good business like Facebook. Not always.”
Facebook has been a massive roller-coaster ride for investors.
The social-media giant went public in 2012, opening at $38 a share. A year later, Facebook was trading at $25.76, a loss of 32 percent compared with the IPO price. It has paid off for those who have held on; Facebook was trading at $168 on Monday.
Snap, on the other hand, hit the open market two years ago at $17 a share. The stock surged 44 percent the first day. A year later, the shares were up 6 percent. Snap was selling for $11 on Monday.
”Amazon didn’t make money for years,” said Washington investor Michael Farr. “In time a fair price will emerge on these unicorns and real investors will show themselves. In the meantime, you are seeing investors who are interested in a quick pop and not a long-term investment.” Amazon’s founder and chief executive, Jeffrey P. Bezos, owns The Washington Post.
S&P Global Market Intelligence examined companies that went public at a value above $500 million since 2009. About 65 percent showed a positive change in the stock price after six months from the IPO. At the end of a year, 62 percent showed a positive change in the equity price.
Some of the Monday boomerang can be attributed to timing. Last Friday was the end of the first quarter. Some pre-IPO investors may have delayed selling the stock until Monday because of disclosure reasons, according to observers.
“To avoid the underwriters’ scrutiny, big investors who were allocated stock in the offering may have waited until April 1 to sell so that their quarter-end reports didn’t reveal their flightiness,” said Daniel P. Wiener, chief executive officer of Adviser Investments, a Newton, Mass.-based money manager. “It was a short ride for Lyft’s shares.”
Smith said the fact that Lyft reversed itself and plunged below its IPO price is a cautionary tale.
“This is a technical black eye,” Smith said. “Investors will not forget. The good news is that the companies coming out following Lyft, such as Uber and Pinterest, should be priced more reasonably.”