Lyft IPO sets the stage for Uber listing
April 10, 2019
March 30th, 2019
View the article on Financial Times
Silicon Valley’s best known private companies have raised huge amounts of money at breathtaking valuations from investors happy to bet on fast growth without profits.
Now those same companies are asking the public markets to do the same.
“No companies have ever raised and lost more money faster at a higher valuation than Uber and Lyft,” said Len Sherman, a professor at Columbia Business School.
Lyft kicked off an expected wave of US technology listings with a $2.3bn initial public offering on Thursday. Shares rose 8.7 per cent in their first day of trading on Friday, giving the ride-hailing company a market capitalisation of $22.4bn, close to Fiat Chrysler’s $23bn.
That made Lyft the biggest US IPO of 2019 to date and the biggest IPO of a US technology company since Snap in 2017. It is expected to lose those crowns quickly, however, as Uber, the US’s dominant car-booking app, gears up for its own listing as early as next month.
Uber’s bankers and investors believe the company could reach a valuation of $100bn or more, which could make it the largest IPO of a US company in history. That thesis has only been strengthened by Wall Street’s reception of Lyft.
One investor said a “$120bn [valuation for Uber] doesn’t look too unreasonable” given Lyft’s early performance.
Lyft’s offering was oversubscribed just two days into its roadshow. The company hiked its anticipated price range on the eve of pricing and increased the number of shares on offer. Investors and bankers said the flurry of interest signaled a craving for a new crop of high-growth companies.
“The combination of the strong demand for Lyft with Uber coming just a month later is a good sign,” said Bradley Tusk, an early Uber investor and former adviser to the company.
But Uber and Lyft are not only setting records when it comes to their valuations. Both companies are deeply lossmaking and executives have indicated to investors that profitability is not a near-term prospect.
Uber, whose business stretches from ride-hailing and food delivery on several continents to freight booking and flying taxis, narrowed net losses to $3.3bn last year from $4.5bn in 2017. At Lyft, which only operates in the US and Canada, losses rose 32 per cent to $911m in 2018.
Both companies have for years relied on a steady stream of venture capital to subsidise fares as they competed fiercely for market share. Uber has raised more than $24bn in equity and debt since its 2009 founding, according to Crunchbase. Before its IPO, Lyft had raised just under $5bn as a private company.
“The amount of capital these companies need to compete and continue to grow is significant,” said Alex Castelli, managing partner at the accountancy CohnReznick.
Even among today’s herd of richly valued “unicorns”, the amount of money Uber and Lyft have lost stands out.
Pinterest, which has teed up an April listing, said its net losses fell by half to $63m last year. The image-sharing platform was valued at more than $12bn in its most recent private round.
Rental platform Airbnb, valued at $31bn in its last fundraising in 2017, has not disclosed much financial information but says it was profitable on an ebitda basis in 2017 and 2018.
While Google and Facebook had already reported profits by the time they went public, a number of recent big tech listings have been by companies still in the red. Spotify lost €1.24bn in the year before its unusual 2018 direct listing and Snap lost $515m in the year before it went public.
Last year, 81 per cent of US companies that went public reported losses in the 12 months before their IPOs, according to data collected by Jay Ritter, a University of Florida finance professor. That matched the high-water mark set in 2000 at the height of the dotcom bubble.
Uber has made moves to trim losses in recent years. In China, Russia and south-east Asia it sold its businesses to regional rivals in exchange for minority stakes in Didi Chuxing, Yandex and Grab, respectively. Last week it said it would buy Careem, its biggest competitor in the Middle East, for $3.1bn.
Executives will probably highlight those moves to potential shareholders as evidence of a more sober approach to capital management than in its earlier days.
Some investors and analysts believe that once Uber and Lyft are public, they will stop cutting prices so aggressively, which would help pave the way to profits.
Tom White, an equity analyst at D.A. Davidson, compared it to the “duopoly” in online travel formed by publicly traded Expedia and Booking Holdings.
“It’s competitive but you have rational actors trying to balance and optimise both growth and profitability. That could very likely happen [with Lyft and Uber]. But right now it’s in land-grab mode, with pressure to show great growth rates.”
The question going forward is how long public markets will tolerate losses on this scale.
“It’s OK to be unprofitable for a period of time while the ramp is getting you to a position of generating return,” said James Gellert, chief executive of RapidRatings, which assesses companies’ financial health. “But if you can’t get there or it is taking longer than you expect then you’re under-serving the investor.”