Lyft’s stock just hit the brakes in a major way.
initial public offering on Friday, with its stock soaring over 20 percent above its target price range. Shares reversed later in Friday’s session but settled roughly 9 percent higher.
But the negative action continued Monday, with Lyft shares sinking nearly 12 percent on their first full-length day of trading. Experts say it’s a sign that money-losing companies may not have as easy a time as they think going public in 2019.
“Look at what happened with Levi’s, an old, staid company with great cash flow [and] boring growth metrics, versus Lyft, which has fantastic growth and sales, but makes absolutely nothing,” Kevin O’Leary, chairman of O’Shares ETFs and co-host of “Shark Tank,” said Monday on CNBC’s “ETF Edge.”
“I always ask myself when I’m buying a stock, what portion of the free cash do I get in the form of a dividend each quarter? And the answer is obvious. You can measure it with something like a Levi’s, but there is no free cash at Lyft,” he said. “We can debate this till the cows come home, but that’s a very treacherous stock. It makes no money.”
O’Leary called Monday’s action in Lyft “extremely negative,” especially considering all of the IPO buyers that are now losing money on Day 2. He added that these declines will likely “tamper enthusiasm” for other highly anticipated offerings, including that of social media company Pinterest and Lyft rival Uber.
On Tuesday, Seaport Global Securities initiated coverage of Lyft with a sell recommendation and a price target of $42 per share. Its stock price was pointing down 4.5 percent in Tuesday’s premarket, at $65.88 per share.
“In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service,” Seaport said in an investor note. “Despite the optics of vehicles being an underutilized asset, we believe people will continue to own their own vehicles as primary transportation and instead rely on the ridesharing services as a convenient supplement.
Ric Edelman, executive chairman and co-founder of Edelman Financial Engines, said in the CNBC segment that the market made a “rational” move by pushing Lyft’s stock below its initial price.
“We’re not telling any of our clients to buy into these IPOs,” he added, pointing out that not only is the company unprofitable, but it actually loses roughly $1 billion per year. “It’s not really a transportation play, although it would seem to be. It’s really a financial services play, because it’s the investment bankers that are getting rich.”
Still, Edelman said Lyft’s arbitrary repricing would be good for stocks over the long term.
“It’s very healthy for the market overall. The IPOs are great news for investors generally and long term,” he said. “It’s great news for the investment banking community. We just need to make sure that we’re dealing with it rationally.”
But O’Leary, who is also a CNBC contributor, was concerned about the longer-term performance of Uber and Lyft, saying his personal experience using their apps is precisely what makes him worry about them as public entities.
“One way to look at Lyft and Uber [is] they’re basically limo-livery services with people and cars. The technology’s not proprietary,” he said. “I use the service every single day. … Every time I use it, if you’re a shareholder, I thank you, because you’re subsidizing my ride. … You’re losing a lot of money to put me in that car. So I’m an investor in Lyft in the sense that I get in the car, and you’re an investor in me, Mr. Wonderful, by paying for my ride, up to 20 percent of its cost. You should really think that through when you’re going to buy a stock like that. You’re paying me to drive around cheaper. Why should I get that benefit? It’s kind of crazy.”
Edelman more or less agreed: “This is why it makes perfect sense as a consumer to use the product but a really bad idea as an investor to add it to your portfolio.”
Lyft’s stock closed just above $69 a share on Monday, well below the $88 level it grazed shortly after the IPO. Uber and Pinterest are expected to go publiclater this month.
Correction: This story was revised to correct Seaport’s price target for Lyft: It’s $42 per share.
Disclosure: CNBC owns the exclusive off-network cable rights to “Shark Tank.”