Too early to judge Lyft IPO, says PM
Chris Stuchberry, portfolio manager at the Stuchberry Group, Wellington-Altus Private Wealth, admitted he wouldn’t be going in on the unicorn tech firm at this stage but said the negativity over its initial price drop was too knee-jerk.
Lyft’s initial sheen wore off in the first 48 hours, with its price dropping below the $72 IPO. Calling it a classic risk-reward scenario for investors, Stuchberry said Lyft – like Facebook and Snapchat before it – now has to prove its business model to convince the market it can progress from the growth, cash-burn phase through to profitability.
But he said the naysayers have been too quick to judge the firm’s market debut, which has been interpreted as a worrying signpost for a host of other unicorns that plan to list this year, like its rival Uber Technologies Inc. and also Pinterest Inc., Postmates Inc. and Slack Technologies Inc.
Stuchberry told WP: “There is no question that buying something on opening day with minimal public history is a risk but, remember, short-term risk exists in every stock. I could name 100 stocks that you bought last Friday and might not be up on this Tuesday.
“It’s such a short time horizon that it doesn’t make much sense to jump to a conclusion right away. To sit here and look at a company that is trying to disrupt the entire transport business model and has been doing it very successfully for three years and just did a $2 billion IPO and then within days is down 9% … to say its business model is this and that, it’s too soon.”
He pointed to Facebook’s listing in 2012 as being “as bad as an IPO could go”, with its stock down 50% within six months. Just like Lyft now, Mark Zuckerberg & Co had to prove they could run the business and prove it was actually a money-maker. The rest, as they say is history. Snapchat also went through see-saw growing pains, having been priced at $17, opening at $28 and then sinking to $19 in its first month, although its current stock is a worrying $11.
Toronto-based Stuchberry said: “They are hyped because it’s [about] the idea. These companies are where the innovative ideas are. But it’s not like any of them have shown up on the market with this profitability. They are showing up in their massive growth phase, which seems to last longer for these companies.”
He added: “The big picture and most important thing for Lyft is not just proving they can run their business but proving their business model works.
“That’s something other companies don’t really have to do if you are yet another auto parts company, for example. We had Levi’s jeans [have its IPO] two weeks ago and it’s a proven business model and historic. It doesn’t have to prove they can run the business or that it works.
“Lyft, on the other hand, has to do both of those things. With these tech IPOs, there is significantly more risk but I would say quite a lot more reward.”
Personally, Stuchberry likes Lyft and is encouraged by its back-to-back years of 100% growth and $2.2 billion IPO. He urges caution, though, and said the first days of trading should be taken with a pinch of salt. Clients keen on a name must be able to handle the risk involved and from a team perspective, Stuchberry Group prefers to sit back and see how the market settles down.
“On the first day of trading, if you buy at the high you are the person who has paid the most ever for that stock … ever! And that’s always a difficult position to be in. Where possible, we endeavour not to be in that position in any investment.
“If you have a client whose risk tolerance it fits and it makes sense and they really want to, you can always dip a toe in the water and get a piece of what you might want as an initial position. But I don’t think you ever need to do that on opening day.”
Stuchberry hopes Lyft’s “ethical” mission to increase ride sharing and reduce pollution is a success but conceded there may by some overhang because people are still waiting on Uber to enter the IPO battleground. He thinks they can exist together, however, and that the unicorns waiting in the wings should not be concerned by this week’s events.
He said: “Each has to cross the path at some point anyways. The Facebook path, the Twitter path, the Snapchat path … at some point they all have to turn and create that validity.”