Stocks showed modest gains overall yesterday in a somewhat mixed market. Bond yields stabilized and moved back up a bit. This provided a bit of a floor for bank stocks which have been crushed recently. Low interest rates and a flat (or inverted) yield curve are a bank’s biggest headwinds. But that doesn’t mean the curve will stay that way forever. Most bank stocks today pay nice dividends, have much more conservative balance sheets than they did a decade ago, and are experiencing rising loan volume commensurate with a good economy. They aren’t going out of business.
One of today’s big stories is going to center on the initial public offering (IPO) of Lyft, the ride sharing company that, along with Uber, is disrupting the taxi and rent-a-car industries. Lyft, in just a few short years, has built a business with gross revenues of over $8 billion, of which about a quarter filters down to Lyft itself. The rest goes to its independent drivers. While its net revenues of over $2 billion is still a very impressive number, so is its loss of over $900 million last year.
Nonetheless, Lyft promises to be a very hot stock today. It’s IPO was priced at $72 and will almost certainly open higher. It has all the right sizzle points, a name everyone can identify with, a true disruptor, and well regarded management. But there is also an uncomfortable sense of déjà vu here. In the 1990s, as the Internet was just emerging from its infancy, we saw a flurry of investor excitement surrounding names like Amazon, Yahoo, MySpace and AOL. Amazon, of course, eventually grew to become one of the world’s most valuable companies. The others suffered less enviable fates. And there are dozens that came public in the late 90s full of promise that completely died after the Internet bubble burst. Companies like Exodus Communications that were going to co-host all this Internet activity exploded onto Wall Street and then promptly died. They were the forerunners of cloud computing, a humongous industry today.
After the dot.com bubble burst, there were virtually no new offerings until Google# came public. Google grabbed the entire search industry displacing wannabes like Yahoo, Lycos, Alta Vista and Ask Jeeves among others. Beside disrupting the disruptors, it was also profitable. Not long after, Facebook# came public. After a very rocky start when its share price fell in half from its opening day hurrah, it also became one of the world’s most valuable companies. Other slightly less well known names followed and became big successes like Salesforce.
But as markets do, over time the success of Google, Facebook, Salesforce and others eventually gives birth to the next generation. That generation produces more excitement with less substance. Lyft is the first of its generation to go public but, based on news reports and SEC filings, it won’t be the last. In fact, there is a long line waiting. Private equity and venture capital funded a long list of disruptive companies in the wake of the Great Recession. These companies are not so large that they have to come public to provide an exit for founding investors as well as employees. Size wise, some of these companies are big. Uber could well come public later this year with a valuation of over $100 billion. But for public investors, the big question is “Are they worth it?” The answer is we don’t know.
Let’s look just for a moment at Lyft. The notion of ride sharing is very appealing. We are in our cars only a few hours per week. 90%+ of the time, they sit idle, a very inefficient use of capital. The notion of ride sharing eventually gave birth to Zipcar and other early forms of ride sharing, but it was Uber that appears to have cracked the secret code. The word Uber has become a verb as in “I’m going to Uber to my office this morning.” It is as generic as Kleenex, Xerox or Google.
But unfortunately for both Lyft and Uber, the underlying economic model doesn’t appear to work. Both companies need to price their product below cost to compete with traditional taxi services. Furthermore, what each offer is a complete commodity. In fact, it is rather common for drivers to work for both Uber and Lyft simultaneously. Their apps are almost identical except for the logos. Strangely, because pricing is done by algorithms, the price of a Lyft ride or an Uber ride can vary substantially with the same driver and the same car!
So why is the idea of a Lyft IPO so exciting? In a sense, the best comparison is to an early stage biotech company that is building a business on the basis of a few drugs with big promise. The big promise for Lyft and Uber is autonomous vehicles. Without the need to pay a driver, the economics suddenly get a whole lot better. And so are the opportunities. Think of driverless trucks, for instance.
Is the future of autonomous driving that exciting? Obviously, many think it is. Will Uber and Lyft dominate autonomous ride sharing the way they do today with traditional vehicles and conventional drivers? No one knows the answers. When will there be commercial autonomous vehicles? I don’t know, but it isn’t going to be in the next year or two. What about companies like Google and General Motors who are spending huge sums to develop autonomous vehicles? Will they be future competitors or partners? Again, we can only speculate.
My best guess, based on past IPO booms, is that the same sort of boom era might be upon us this year but that will be followed by a cathartic cleansing, one that will take most of the pending 2019 IPOs back down below their offering prices. Some will ultimately fail. A few will be the next generation Google or Facebook. Some of the biggest names will succeed but others will fail. Is Lyft the next Amazon or the next AOL? I wouldn’t try to predict that.
As a trader/speculator, what sits in front of us could be exciting times. A lot will depend on what happens to Lyft’s stock over the next few weeks. If Lyft is a big success, others will feed off of its success. Eventually, however, the companies coming public will become a little bit iffier, a little bit more speculative, and a lot more prone to total failure. That, simply said, is the IPO cycle. As an investor, maybe the best path is to let the markets sort this all out first. Let the euphoria subside, wait for the bubble to ultimately burst to see which companies are real and which are hype, and then invest when valuations are more in synch with reality. If you want to dabble now and play along with what could be an exciting ride, go for it. But do so with a measured amount of money and remember that euphoria may build but, on Wall Street, it doesn’t last forever.
Today, model Elle Macpherson is 55. It is also the 101st anniversary of the birth of Sam Walton, the founder of Walmart.
James M. Meyer, CFA 610-260-2220