Lyft will set the price for shares in its initial public offering (IPO) after the market closes today. Just 2 weeks ago, Robert Frazier, one of my best value managers, told us why he wouldn’t buy into this IPO. Since then, Lyft’s investment bankers must have put on quite a roadshow because the price range has been raised to $70 to $72 from $62 to $68. I asked Robert, who is already up more than 20% this year, if any new information has come out that might change his mind.
Ken Kam: Robert, it seems that Lyft’s roadshow has been well received on Wall Street as the target range for their shares has been raised. Has anything come to light since our last conversation that might change your opinion?
Robert Frazier: We should not see companies like Lyft, with large losses and high valuations, as investments. They are exit events for early investors.
The owners and early employees have wrung all of the value growth and user growth that they could out of the private capital market, so now it is time to tap the public market.
Kam: I appreciate how difficult it is for a value investor to buy into a company that is not profitable. Do you see any prospect for Lyft to be attractive to value investors?
Frazier: I still don’t see a credible scenario in which Lyft will generate great earnings. People will not pay the premiums for the convenience that would be needed to make it profitable, let alone a growing enterprise.
Kam: Lyft has shown impressive revenue growth, but that growth has increased their losses. What do the IPO buyers think is going to happen?
Frazier: The story is that if they can grow users by 4-10 times, they will be profitable.
I don’t like the fundamentals of Lyft’s business. They did not reach profitability with the billions of private capital already invested. I don’t think they are raising enough public capital to reach a profitable scale. That’s why I am staying clear of this public offering.
My Take: It looks like Lyft’s offering will be fully subscribed to by the underwriting firms’ clients so few if any, IPO shares will be available to normal investors.
For months after the IPO, the underwriters will be actively trading the stock seeking to establish an orderly market in which Lyft can settle on a market clearing price.
During this “stabilization” period, Lyft’s insiders will most likely be prohibited from selling shares that they did not sell in the IPO.
In addition, those who were able to buy shares at the IPO price will be strongly discouraged from selling during the stabilization period upon pain of being excluded from future IPOs.
This means that for several months after the IPO, the selling pressure on the stock will be artificially subdued. It may be six months before the handcuffs come off and the full extent of the selling pressure is released and a true market price revealed. If you are interested in buying Lyft’s stock, wait until then.
Robert’s Medium Term Value Fund has a 13+ year track record at Marketocracy. Over that period, Robert’s model averaged 12,02% a year which compares well to the S&P 500’s 8.57% return for the same period.