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After Lyft, IPO investors will be sure to buckle up


Lyft’s first week as a public company turned out to be a wild ride.

Shares initially rallied in their Nasdaq debut last Friday, shooting up more than 20 per cent and delivering the requisite “pop” sought by many investors buying into initial public offerings. But momentum rapidly faded and by Monday the stock had dropped below the offer price of $72.

The first week is, of course, too soon to make predictions for the long-term trajectory for Lyft’s stock. Looming on the horizon is the company’s first quarterly earnings report as a public company, which often sets the tone for nearer-term prospects. The first set of results is due next month.

Still, investors, bankers and presumably Lyft itself have spent time this week asking why one of the year’s most anticipated IPOs shifted gears so quickly.

IPOs are notoriously volatile, of course. The idea is to offer investors a valuation discount in exchange for the risk of taking a chance on something new. Given that, a stock might jump 10-20 per cent in early trading. But if it goes up too much — say 40-50 per cent — rivals will be snickering that sellers left money on the table.

Striking that balance is tricky, hence the fee collected by bankers. Underwriters were paid $64m, or a gross spread of 2.75 per cent — higher than similar but larger deals such as Facebook (1.1 per cent), Alibaba (1.2 per cent) or Snap (2.5 per cent).

“Underwriters always have a problem figuring out what is true ‘buy and hold’ demand versus investors that are hoping to make a quick buck by flipping an IPO,” says Jay Ritter, a finance professor at the University of Florida. “They get indications of interest through bookbuilding, but it is hard to tell how much is true demand. When you hear an offering is 20 times oversubscribed, it does not really mean that there is buy and hold demand for all those shares.”

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By the second day of Lyft’s roadshow, the word went out that the deal was already oversubscribed; that is, there was more demand from investors than Lyft shares on offer. On popular IPOs, investors routinely inflate their orders based on the understanding they will not receive all that they asked for — further pumping up the perceived demand.

The enthusiasm around Lyft was also fuelled by the other tech “unicorns”, or companies that have achieved $1bn-plus price tags from private investors, lined up behind it.

Investors have been waiting a long time — years, in some cases — for these companies to go public, as the latest generation of tech entrepreneurs stays private far longer than their predecessors. The desire is even more pressing now that the so-called Faang stocks have lost some of their lustre, adding to the demand for new names with fresher growth stories. Lyft’s fellow ride-sharing company Uber and image-sharing platform Pinterest are among those planning to list this year.

The price range for Lyft shares was increased and the stock still sold atop the boosted range at $72 — setting a high bar.

Once the allocations to investors were made, reality seemed to replace excitement. While Lyft was growing rapidly — revenues doubled last year to $2.16bn — the company booked a loss of nearly $1bn.

Complicating the number-crunching is that ride-sharing is a new type of business, meaning there are no existing publicly traded companies to use as a valuation yardstick. This will probably prove true for many other unicorns going public.

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Lyft also had to grapple with unusually large short-selling interest — the equivalent of nearly 40 per cent of the float by the end of the second day of trading on Monday, according to S3 Partners. That is roughly double the share of negative bets that Snap saw in its first few days; and much higher than older-school companies such as Levi Strauss, where shorts held less than 2 per cent.

Around the bend, too, is Lyft’s much larger rival, Uber, which is set to go public in the coming weeks, a factor that may have given an extra incentive to “flip” the shares. Lyft now has a market value of about $21bn, while Uber’s could exceed $100bn.

Since companies such as Lyft are well-known brands with products or services used by large swaths of the investing public, they tend to attract retail investors who are not the most patient of shareholders.

All told, the week’s trading in Lyft serves as a reminder that the transition from private to public ownership can be a bumpy one.

“It has been a long time since we have had a lot of IPOs,” says Nicholas Colas, co-founder of DataTrek, a New York-based research firm. “Capital markets are probably a little rusty at pricing. If Lyft does not move comfortably above its IPO price soon, people will ask for more of a discount on the next one.”

nicole.bullock@ft.com



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