Reporting revenue growth at a 150% CAGR in the last two years and with growing CFO, Lyft (LYFT) should be considered by both growth and value investors. The fact that the company expects to convert its convertible preferred stock is also quite beneficial; investors do not need to worry about conversion and stock dilution risk. But even with all these positive factors, it is not ideal that the company expects to have a class B stock that only the founders will own. Please note that the co-founders may vote to put through decisions that may harm the interests of minority shareholders. Investors may not believe that this is a serious issue, but they should take note of it.
Founded in 2012, Lyft offers a peer-to-peer marketplace for on-demand ridesharing. While the business model may seem very simple, the business generation is massive, and well-known companies like General Motors (GM), Fidelity and Alphabet (GOOG) (NASDAQ:GOOGL) are behind the company.
As shown in the image below, 1.9 million drivers work with the company and more than 30 million riders used the company’s services in 2018. The image below provides the details:
Source: Lyft prospectus
Either the company is doing their work pretty well or they have found a massive market opportunity. Keep in mind that the number of active riders increased by 531% from 2016 to December 2018. In addition, Lyft was able to increase the revenue per active rider from $15.88 million to $36.04 million without losing on number of active riders or rides. The table below provides further details on this matter:
Source: Lyft prospectus
The market opportunity seems massive. The total amount of expenditure made by U.S. households is larger than any other costs apart from housing. In addition, only taking into account the U.S. market, consumers pay over $1.2 trillion annually on transportation. It seem clear that the amount of people who could share cars and use Lyft is massive.
The company is very positive on the feedback given by clients and the future of this business model:
In 2018, almost half of our riders reported that they use their cars less because of Lyft, and 22% reported that owning a car has become less important. As this evolution continues, we believe there is a massive opportunity for us to improve the lives of our riders by connecting them to more affordable and convenient transportation options.
Source: Lyft prospectus
Revenue And Cash Flow Statement
Revenue growth is what investors should like the most in this name. The company reported $0.343 billion, $1.05 billion and $2.156 billion in 2016, 2017 and 2018, respectively. That’s more than 150% CAGR, which should attract many growth investors.
Still, the company has not reached breakeven. While this may not worry most growth investors, value investors may not like it. The total amounts of costs and expenses in 2018 and 2017 was $3.13 billion and $1.7 billion, respectively. The net loss increased by 32% in 2018 to $0.911 million. The image below provides further details on this matter:
Source: Lyft prospectus
The cash flow statement should interest value investors more than the income statement. While the company is not reporting cash flow from operations, this figure is increasing and may reach $0 soon. In 2018, net cash used in operating activities increased from -$0.393 million to -$0.28 million. The image below provides further details on this matter:
Source: Lyft prospectus
With an asset/liability ratio of 2.55x, Lyft’s financial condition seems very stable. It is also very favorable that the amount of assets is increasing. In 2018, the company reported $3.76 billion in total assets, 24% more than that in 2017. The increase in assets was due to an increase in restricted investments, increase in properties, goodwill and intangible assets. The most relevant increase in value was that of restricted investments. These are payments to insurance providers. The highlighted text below provides further details on this matter:
Source: Lyft prospectus
The table below provides the list of assets:
Source: Lyft prospectus
Source: Lyft prospectus
On the liabilities front, investors should appreciate that the company did not report any financial debt. The financial risk seems close to zero. The image below provides the list of liabilities:
Source: Lyft prospectus
With regard to contractual obligations, the company does not seem to have anything hidden that may worry investors. The company reports noncancelable purchase agreements of $144 million and $411 million in operating-lease commitments. The amount of cash seems sufficient to pay the contractual obligations. The image below provides further details on this matter:
As mentioned above, the company financed its operations with convertible preferred stock. These securities may not be appreciated by certain investors because they could create stock dilution and might reduce the share price. Below are further details on these securities:
Source: Lyft prospectus
In this regard, investors should appreciate that the convertible securities are expected to be converted after the IPO goes live. It is quite ideal, as the risk of stock dilution will decrease quite a bit. Investors need to read the lines below:
219,175,709 shares of preferred stock that will automatically convert into shares of our Class A common stock immediately prior to the completion of this offering pursuant to the terms of our amended and restated certificate of incorporation.
With that said, the company expects to have two types of common stock, A and B. This is worrying and investors should pay attention to it. Keep in mind that class B owners will have 20 votes more per share than will class A stock owners:
Source: Lyft prospectus
As noted in the prospectus, the co-founders are the owners of the class B shares and will hold a large amount of voting power. In this way, they protect their ownership and their posts. This is worrying, as other competitors may not be able to acquire the company if Lyft does not perform well. The quote below provide further details on this matter:
Accordingly, upon the closing of this offering, our Co-Founders will together hold all of the issued and outstanding shares of our Class B common stock and therefore, individually or together, will be able to significantly influence matters submitted to our stockholders for approval, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets or other major corporate transactions.
Source: Lyft prospectus
This is concerning for minority shareholders, who may see the founders vote against transactions that would increase shareholder value. The market may reduce the total valuation of the shares due to this particular factor. The quote below provides further details on how the interests of shareholders and co-founders may differ:
Our Co-Founders, individually or together, may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentrated control may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their capital stock as part of a sale of our company and might ultimately affect the market price of our Class A common stock.
Source: Lyft prospectus
Very Relevant Stockholders
The list of Lyft shareholders is one of the most positive aspects of this name. Well-known organizations like Rakuten, General Motors, Fidelity and Alphabet own shares in the company. The fact that these companies have invested in Lyft bodes very well. The image below provides the list of shareholders:
Another positive is that a member of the board of directors was the managing director of Icahn Capital:
The company has not mentioned whether the founders are expected to control more than 50% of the voting power – something that would be quite relevant for investors. If they control the board of directors, this may mean the board is not independent. It is something to study closely before the IPO goes live.
With revenue growing at a 150% CAGR, increasing cash flow and very well-known shareholders, Lyft should attract growth investors. In addition, the business model seems to target a massive market opportunity, which should help the company operate for a long time.
Again, having mentioned these positive aspects, investors should thoroughly understand the import of the dual-class stock. The co-founders are trying to protect their ownership, which may be detrimental for minority shareholders. Understanding whether the company is controlled does seem key here, as it could affect Lyft’s valuation.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
For income investors, the fixed income space can be one of the most defensive and conservative ways to gain exposure to high yield at low risk. Some fixed income products can be more secure, less volatile and provide stable recurring income compared to common shares. In 2018, bonds, fixed income closed-end funds, and preferred shares experienced declining prices due to fears of rising interest rates. Of course, rising interest rates are a big negative for fixed income as prices of fixed income securities are inversely related to interest rates.
Today the situation is very different. We are seeing slowing economic growth across the globe with inflation remaining stubbornly low. This has prompted central bankers across most developed nations to halt interest rate hikes and with some central bankers re-activating quantitative easing. We believe that we are on track to start seeing declining interest rates again, and therefore we are very bullish on fixed income products. At High Dividend Opportunities we have been writing a series of reports to our members to highlight some of the best fixed income CEFs, preferred stocks and bonds to benefit from this new trend. In fact, we have been increasing the allocation of our model portfolio to high-yield preferred stocks and bonds while still being able to achieve an overall yield of +9%.
In our report today, we highlight one of the best fixed income CEFs the Dynamic Credit and Mortgage Income Fund (PCI).
Pacific Investment Management Company LLC (PIMCO) is a well-known and very large global investment manager with $1.66 trillion in assets under management. Launched in 1971 with only $12 million in assets, PIMCO has earned its reputation as a premier investment manager.
There are a variety of great investments that can be made through PIMCO, but one of our favorites is their Dynamic Credit and Mortgage Income Fund (PCI).
The objective of this fund is “to seek current income as a primary objective and capital appreciation as a secondary objective.” The fund pays a regular monthly dividend of $0.1641, which is higher than its initial dividend of $0.1563/month. Then, depending on annual performance, the fund may or may not pay a special dividend. In 2018, the special dividend was $0.35. At current prices, that is a yield of approximately 8.4% with potential for upside depending on the special dividend.
We believe that PCI is an excellent way for retail investors to gain exposure to types of investments that are not otherwise available to them and receive a stable, steady stream of income from a well-managed fund.
PCI is a closed-end fund or CEF. The main feature that separates a CEF from an open-end fund (“OEF”) is that the number of shares for the fund is fixed. The fund does not issue or redeem shares and capital does not come into or out of the fund. This provides the CEF the advantage of not needing to maintain liquidity for cash out requests and allows them to manage a relatively static pool of assets.
For CEFs, NAV is calculated daily and represents the net value of the assets held within the fund. Since the shares are traded in the open market, the market price will trade in relation to NAV, but it will frequently be at a discount or premium. The discount/premium will reflect the markets opinion on factors such as the growth potential of the assets, the abilities of the fund managers or a preference/aversion to leveraged investments.
PCI has managed to provide a steady income while maintaining the NAV. While NAV will inevitably have fluctuations as values change, it’s important that over the long term a CEF can maintain value to support their distributions.
One benefit of funds is that they allow retail investors to invest in a broad array of investments that would be impossible for a retail investor to replicate. This provides great diversity as well as the opportunity to be part of investments that are generally closed to retail investors.
PCI’s largest sector allocation is mortgage-backed securities (MBS). PCI continues to favor “non-agency” residential MBS. “Non-agency” means that these are mortgages that are not issued under the Fannie Mae or Freddie Mac programs and have no governmental guarantees.
Many investors run in panic at the mere mention of residential MBS, the type of security that played the starring role as the villain in the great recession. This fear has created an opportunity for PCI to acquire residential mortgage backed securities (‘RMBS’), below par, even as industry fundamentals remain very strong.
This graph illustrates the monthly rate at which mortgages become 30 days late. In October of 2018, 0.8% of mortgages became 30 days late. That is down from 1.1% the previous year and significantly below the rates experienced during the “housing boom” of 2000-2006.
Naturally, declining rates of late payments have directly led to fewer significant delinquencies and foreclosures.
This is bullish for MBS because it means that the spread between the underlying collateral covers the mortgage value better.
Despite the fundamentals being stronger than they have been in over two decades, the market remains fearful. The fundamentals are pointing to mortgages as having a very low default rate and the underlying asset values rising in relation to the mortgages.
Despite very strong fundamentals, residential mortgage backed securities are trading at a discount to par. PCI recognizes this as an opportunity where perceived risk is greater than the underlying risk.
Either the market will gradually recognize that the risk assessment is wrong and prices will rise to create a capital gain, or the perception remains wrong and PCI gets a safe return at a much lower price relative to other fixed-income investments.
PCI sees this dynamic as an excellent opportunity and we agree. Even in case we hit a recession in the future, this recession is unlikely to be anything related to the 2007-2008 one. Today, banks and financial institutions are much stronger and more regulated. They also have been much more careful in their lending practices as they are lending in amounts much lower than the value of the mortgaged properties. In case of a recession, the mortgage market is unlikely to take a large hit.
In addition to their MBS and asset-backed investments, PCI invests in corporate debt spread across a variety of industries. The diversity provided by a fund like PCI is something that would be impossible to duplicate in a personal portfolio.
PCI holders get diversity among industries, but also gain some international exposure.
Most importantly, PCI has implemented a significant amount of interest rate swaps. One significant risk of investing in fixed-income securities is changing interest rates, which can leave you trapped in an inferior investment.
Investors researching PCI might see something like this listed under “holdings” and become quite confused about what they are investing in. All of these holdings are interest rate swaps. To mitigate the impact of interest rate changes, PCI is long and short a series of interest rate swaps in a variety of currencies.
This results in PCI’s effective return being slightly smaller if interest rates remain unchanged, but it helps protect their income stream when interest rates do change. Remember, PCI’s first priority is providing current income.
While the complexity of PCI’s hedging through interest rate swaps, credit default swaps, and long/short pair trades can quickly become confusing for even the most seasoned investors, the end result is straight forward.
PCI continues to comfortably cover its dividend which currently stands at 8.3% with net investment Income. It’s this kind of consistent and dependable income that makes PCI a great addition to an income portfolio. The fact that PCI pays the dividend monthly is a great plus. For each share of PCI, investors get $0.164 in dividends on a monthly basis. PCI also has been paying a special dividend at year end in 2014, 2015, 2016, and in 2018.
Currently, PCI is trading at a slight premium to NAV. NAV is $23/share and it is trading at $23.39, a 1.7% premium. We do not believe that premium is excessive and we believe that NAV will continue to increase throughout the year. Also PCI remains one of the cheapest fixed income CEFs from PIMCO. For example:
PIMCO Corporate and Income Opportunity Fund (PTY) trades at a 20% premium to NAV.
PIMCO Income Opportunity (PKO) trades at a 9% premium to NAV.
PIMCO Dynamic Income Fund (PDY) trades at a 16% premium to NAV.
Note as the long-term interest rate yields continue their decline trend (with 29 years of interest rate declines so far), the hunt for yield is only set to accelerate, and it would not be surprising to see all these funds from PIMCO go up in price and reach even higher NAV levels.
Below is the 10-year US Treasury Bond Yield Since 1962
In our opinion, funds like PCI should generally be looked at through the lens of NAV rather than market price. If NAV stays strong, the market will eventually get over itself. PCI’s NAV was 23.86 at IPO and their low was $19.34 in February 2016. Psychologically, the market has not gotten over the mortgage meltdown. Yet the fundamentals are extremely strong and sooner or later the market is going to get over itself and realize it’s overestimating the risk. With PCI trading at a slight premium to NAV now, maybe the market is starting to realize that, but you are right, investors do need to be prepared for the potential of more volatility. We anticipate that any such volatility will be in the price, while the distributions will remain stable thanks to the underlying fundamental strength of the mortgage market. As long as the fundamentals remain strong, we suggest holding through any volatility. At the end of the day, this is an income investment and we believe the income will remain stable regardless of mispricing due to irrational anxiety in the market.
Finally, investors need to keep in mind that we were recently in an increasing interest rate environment, which is bearing for fixed income products like PCI. Starting the year 2020 or 2021, we are likely to start to be in a decreasing interest rate environment. So demand for fixed income products is set to increase significantly, and both the price of PCI should go up in price, resulting in capital gains. Historical NAV prices do not mean much in this case. I’m buying PCI here to lock in the high income now (not for the capital gains). I think the high yields that we are seeing today are unlikely to last long.
PIMCO has a well-earned reputation as a premier investment manager. The PCI fund, in particular, offers income investors an opportunity to diversify while providing a steady and durable stream of monthly income.
The fund primarily focuses on the residential MBS market, a sector which still has the psychological scars of the 2007 recession. The negative sentiment runs contrary to the actual fundamentals.
Fundamentally, the residential mortgage industry is extremely strong. New delinquencies are slowing down, significant delinquencies and foreclosures are at or near multi-decade lows, and the amount of equity in home prices has grown to unprecedented levels. The market is valuing mortgages below par, suggesting high risk, when in reality the risk is pretty low.
Investors are not the only ones carrying the psychological scars of the 2007 recession. The homeowners and people who knew those homeowners remember the tragedy of losing homes to foreclosure. No doubt, that social memory is part of what is encouraging consumers to pay down mortgages and increasing their equity as opposed to refinancing.
PCI has recognized this and has invested in a big way, securing a steady stream of mortgage income at below par prices. We believe that this strategy is going to continue being successful. The fundamentals are strong and will remain strong. Either the market will realize that and PCI can benefit from capital gains, or it will not and PCI can continue investing in mortgages at a discount.
We also appreciate PCI hedging both the short and long-end of the interest rate curve. This will help PCI continue to provide investors steady income regardless of how interest rates change.
PCI will continue to provide investors with a solid 8.4% yield with special dividend distributions on top. Additionally, we believe that PCI will experience an increasing NAV as the market’s unreasonable fear toward residential MBS fades. This is a premium CEF for income investors.
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Disclosure:I am/we are long PCI, PTY.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Lyft plans to launch the roadshow next week leading up to one of the largest and most highly anticipated IPOs in recent years. Here’s a look at what an IPO roadshow is and what investors can expect.
What’s A Roadshow?
The first steps in conducting an IPO are for the company going public to assemble a team of underwriters to draft a form S-1 to submit to the Securities and Exchange Commission to gain regulatory approval for the IPO. Once the IPO is approved, the underwriters organize a roadshow to travel and meet with prospective investors.
During the roadshow, the underwriters typically explain the circumstances of the IPO to investors, including factors such as how many shares of stock the company is selling and the target valuation.
The purpose of the roadshow is to sell shares of stock, but also to gauge the level of market interest and narrow the target price range of IPO shares.
The underwriters have a lot riding on getting the IPO price right. If the IPO price is too low, the underwriters failed the company in maximizing its funding. If the IPO price is too high, the underwriters failed the IPO investors in protecting their investment.
When a company meets with investors during its roadshow, it typically makes a presentation to investors and then conducts a Q&A session. The presentation includes information from the S-1 filings broken down into easily digestible chunks. It also typically includes a sales video telling the company’s story and highlighting its long-term goals. Companies can then for the first time get real-time feedback on their story and financial numbers — and an understanding of what investor concerns may be once the stock hits the market.
Roadshows typically take place roughly two or three weeks prior to the potential IPO date. In the case of Lyft, the March 18 roadshow date suggests a late April IPO is possible.
What To Expect From Lyft
Since Lyft is one of the larger IPOs in recent history, the company’s roadshow is expected to last two weeks.
Heading into the roadshow, Lyft is anticipating an IPO valuation in the $20 billion to $25 billion range. Potential Lyft investors and even Uber investors will be watching the Lyft road show closely for any signals that demand and valuation are stronger or weaker than anticipated.
Lyft’s much larger competitor Uber is also planning to go public this year at a valuation of around $190 billion.
Once the Lyft roadshow is complete, the company will likely announce a target IPO date some time in April. Investors will finally get all the details about the anticipated IPO pricing, company valuation and the total number of shares sold on the day prior to the IPO date. This date is also when IPO investors find out how many shares they were able to purchase at the IPO price.
Because of the government shut down earlier in the year, there was a delay in with IPOs as the SEC could not evaluate the filings. But now it looks like the market is getting ready for a flood of deals.
One of the first will be PagerDuty, which was actually founded during the financial crisis of 2009. The core mission of the company is “to connect teams to real-time opportunity and elevate work to the outcomes that matter.”
Interestingly enough, PagerDuty refers to itself as the central nervous system of a digital enterprise. This means continuously analyzing systems to detect risks but also to find opportunities to improve operations, increase revenues and promote more innovation.
Keep in mind that this is far from easy. After all, most data is just useless noise. But then again, in today’s world where people expect quick action and standout customer experiences, it is important to truly understand data.
The PagerDuty S-1 highlights this with some of the following findings:
The abandon rate is 53% for mobile website visitors if the site takes longer than three seconds to load.
A major online retailer can lose up to $500,000 in revenue for every minute of downtime.
A survey from PricewaterhouseCoopers shows that 32% of customers say they would ditch a brand after one bad experience.
As for PagerDuty, it has built a massive data set from over 10,000 customers. Consider that this has allowed the company to leverage cutting-edge AI (Artificial Intelligence) models that supercharge the insights.
Here’s how PagerDuty describes it in the S-1 filing: “We apply machine learning to data collected by our platform to help our customers identify incidents from the billions of digital signals they collect each day. We do this by automatically converting data from virtually any software-enabled system or device into a common format and applying machine-learning algorithms to find patterns and correlations across that data in real time. We provide teams with visibility into similar incidents and human context, based on data related to past actions that we have collected over time, enabling them to accelerate time to resolution.”
The result is that there are a myriad of powerful use cases. For example, the AI helps GoodEggs to monitor warehouses to make sure food is fresh. Then there is the case with Slack, which uses the technology to remove friction in dealing with the incident response process.
For PagerDuty, the result has been durable growth on the top line, with revenues jumping 48% during the past year. The company also has a 139% net retention rate and counts 33% of the Fortune 500 companies as customers.
Yet PagerDuty is still in the nascent stages of the opportunity. Note that the company estimates the total addressable market at over $25 billion, which is based on an estimated 85 million users.
Data + AI
But again, when looking at the IPO, it’s really about the data mixed with AI models. This is a powerful combination and should allow for strong barriers to entry, which will be difficult to replicate. There is a virtuous cycle as the systems get smarter and smarter.
Granted, there are certainly risk factors. If the AI fails to effectively detect some of the threats or gives off false positives, then PagerDuty’s business would likely be greatly impacted.
But so far, it seems that the company has been able to build a robust infrastructure.
Now the PagerDuty IPO — which will likely hit the markets in the next couple weeks — will be just one of the AI-related companies that will pull off their offerings. Basically, get ready for a lot more – and fast.
Tom serves on the advisory boards of tech startups and can be reached at hissite.
Nashville-based SmileDirectClub is laying the groundwork for an initial public offering, Axios reported on Thursday.
SmileDirect has picked bankers for an upcoming IPO and is expected to file paperwork to go public by the end of June, according to Axois. JPMorgan is leading the process, Axios reported.
If SmileDirect does file an IPO, the company would become one of Middle Tennessee’s ten largest publicly traded health care companies. That’s based on Nashville Business Journal research and Axios’ reporting that SmileDirect has projected $1 billion of revenue this year.
A representative from SmileDirect declined comment to the Nashville Business Journal.
The decision to become take on public investors in another step in SmileDirect’s meteoric rise. As we reported in this week’s cover story, the company moved its headquarters to Nashville in 2016 with 60 employees and has quickly grown to one of Nashville’s largest employers with a workforce of more than 4,000, 1,600 of which are in the Nashville area. The company recently doubled the size of its headquarters inside Philips Plaza, from 20,372 square feet to more than 40,000 square feet.
In October, the company raised its first round of private equity capital, for a total of $380 million at a valuation of $3.2 billion, led by private-equity firm Clayton Dubilier & Rice. Two years ago the company, which ships invisible aligners to customers across the U.S. as an alternative to traditional braces, was reportedly worth $275 million.
SmileDirect’s platform allows patients to make an impression of their teeth with a kit that is sent to their home or visit a SmileShop for a 3D scan. The impression or scan is then shipped back to the company where a licensed dentist makes a mold and the aligners are made. Once the product is shipped back to the customer, they check in with a dentist every 90 days with photos of their progress. Patients can also communicate with care specialists via text, chat or phone if they experience any problems or have any questions. The company said the treatment process usually takes about six months.
SmileDirect has not been without its critics and is no stranger to the courtroom. The company has filed lawsuits against the Michigan Dental Association for false light and trade libel, Gizmodo Media Group and reporter Nick Douglas over a provocatively headlined article and a group of New York and New Jersey orthodontists who made a YouTube video critiquing its product.
The company is currently suing dental regulatory boards in Georgia and Alabama for rules that would require a dentist to be present in each of its SmileShops in those sates.
Most recently, SmileDirect won an arbitration case against Align Technology Inc., which also supplies invisible aligners to SmileDirect, for violating a non-compete agreement. As a result, Align will be forced to close all 12 of its Invisalign-branded stores and is prohibited from opening any new retail locations engaged in the marketing or sale of clear aligners. The decision also forces Align to return its ownership stake in SmileDirect and extends the parties’ non-compete provision until 2022.
The Nashville, TN-based healthcare tech firm provides data and analytics-driven solutions to improve clinical, financial and patient engagement outcomes in the U.S. healthcare system. It says its solutions are designed to improve decision making, simplify billing, collection and payment processes and enable a better patient experience.
2018 Financials (nine-month period ended Dec. 31): Revenues: $2,264.7M; Net Income: $139.0M; Non-GAAP EBITDA: $677.8M.
More than 30 years after it was taken private, Levi Strauss & Co. ( LEVI ) is returning to the public markets in the week ahead. In total, four IPOs plan to raise about $1.4 billion in the IPO market – more than the year’s 13 IPOs combined. Another blank check company could list this week as well.
Levi’s plans to raise $550 million by offering shares at $14-$16; at the midpoint it would be valued at $6.1 billion IPO. The world’s largest denim brand is going public with some strong tailwinds: the company grew 14% in 2018, its highest growth rate in 20 years . Management has improved gross margins to a 20-year high as well. While Levi’s has opened many new stores, it still relies heavily on wholesale customers.
Blackstone-backed HR services provider Alight (ALIT) plans to raise $752 million at a market cap of $4.8 billion ($7.3 billion enterprise value). The company grew just 3% in 2018, and it carries a lot of debt, but investors may be attracted to its position as a steadily growing business with expanding margins and most of the Fortune 100 as customers.
UP Fintech ( TIGR ), also known as Tiger Brokers, is coming public immediately after its larger peer Futu Holdings (FHL), up 50% from its US IPO in early March. UP Fintech is aiming to raise $78 million at a market cap of $873 million.
The week could also see IPOs from medical food and device company Guardion Health Sciences (GHSI), on file for an $8 million offering, and Cowen-backed blank check company Insurance Acquisition ( ILSUU ).
Alight will be the year’s largest IPO by deal size, and Levi’s will be the largest by market cap, but those records should soon be broken by Lyft (LYFT), which is expected to join the IPO calendar as early as Monday for end-of-month pricing. Gene edited CAR T biotech Precision BioSciences (DTIL) may also launch on Monday, while high-growth device maker Silk Road Medical (SILK), cybersecurity software seller Tufin (TUFN) and trading platform Tradeweb (TW) can come later in the week.
IPO Market Snapshot The Renaissance IPO Indices are market cap weighted baskets of newly public companies. As of 3/14/19, the Renaissance IPO Index was up 30.6% year-to-date, while the S&P 500 had a gain of 12.6%. Renaissance Capital’s IPO ETF ( IPO ) tracks the index, and top ETF holdings include VICI Properties (VICI) and Spotify (SPOT). The Renaissance International IPO Index was up 8.8% year-to-date, while the ACWX was up 9.8%. Renaissance Capital’s International IPO ETF ( IPOS ) tracks the index, and top ETF holdings include SoftBank and China Tower.
Investment Disclosure: The information and opinions expressed herein were prepared by Renaissance Capital’s research analysts and do not constitute an offer to buy or sell any security. Renaissance Capital’s Renaissance IPO ETF (symbol: IPO) , Renaissance International ETF (symbol: IPOS) , or separately managed institutional accounts may have investments in securities of companies mentioned.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Shares of Lyft, Inc. (LYFT), a fast-growing transportation network company, are going to get listed on the Nasdaq stock exchange before its bigger rival, the more famous Uber (UBER). Even though taxi space has been historically a challenging place for finding black figures on the bottom line, Lyft’s exceptional top-line growth testifies the concept is fundamentally viable.
Lyft is an on-demand transportation network company, facilitating ride-sharing and ride-hailing services in the United States and Canada. As of December 31, 2018, the company had approximately 4,680 full-time employees (which is approximately 3.2x more than it had in December 2016). The company also operates a network of shared bicycles and scooters in selected cities to address the needs of people who are looking for short trips. Besides a ride-sharing technology platform, the company also provides insurance protection for its drivers and customers.
”Think of not only the technology, but also the product. Technology can get you excited day-to-day, but in the long run, you’ll only have an impact when you built a successful product.” – Ashesh Jain, Head of Perception
Lyft’s background story in brief
Originally called Zimride, Lyft’s early beginnings can be attributed to a college car-sharing project. Frustrated by local public transport and being stuck in traffic, Logan Green, a student of the University of California, Santa Barbara, came up with a car-sharing program for over 2,000 people largely across college campuses. After finishing his studies, Green sourced additional inspiration from a trip to Zimbabwe where he observed locals utilizing crowdsourced minivan taxis. Using the Facebook API, Green, alongside John Zimmer, created an app in honor of Zimbabwe’s carpooling network. In 2013, the business reincorporated as Lyft with the aim of a more frequent engagement with its users.
According to conclusions of several academic studies, companies with their founder in the role of the CEO or other considerable influence on the business tend to substantially outperform their lacking-founder-as-a-CEO peers. Three years ago, global management consulting company Bain & Co. analyzed a few hundred founder-led companies and identified three elements that set them companies apart: a business insurgency, a front-line obsession and an owner’s mindset. As already mentioned in the paragraph above, the founders of Lyft are Logan Green and John Zimmer, who seem to have a clear vision for the company and an uncanny ability to execute.
How much is Lyft worth?
In the light of revenue variation of popular Peter Lynch’s earnings line for the projection of probable per share values of the company, I see Lyft’s IPO as very attractive. According to my model assuming 75 percent annual revenue growth decreasing by 10 percent each year, 227 million shares outstanding (219 million shares of common stock originating from convertible preferred stock + 8.6 million of the common stock issued as RSUs) diluting at 10 percent annual rate and an average price-to-sales (P/S) ratio of 5x, the company’s intrinsic value by the end of 2022 is forecasted to reach $210 USD. If the company’s shares get bought at 10x price-to-sales multiple, the company’s long run potential could lie well above 10 percent. Should the price-to-sales multiple be rather lower, let’s say 5x, the company’s shares could offer a positive annualized rate of return potential of more than 20 percent.
Source: Author’s own Excel model
The company’s limited operating history makes it difficult to accurately access the company’s future prospects.
The company operates in a highly competitive environment and can lose its market share if it operates inefficiently.
If the company fails to attract and retain qualified drivers, increase utilization of its platform by existing drivers, its financial condition and operations could be harmed.
The company relies on third-party insurance policies, which can negatively impact the company’s revenues and operating results.
The company is subject to a wide range of laws and regulations, many of which are evolving and may differ in various countries.
If the company fails to efficiently develop its own autonomous vehicle or develop partnerships in a timely manner, its financial results and operations may be negatively affected.
If the company’s security systems are breached, the company’s reputation may be harmed.
The company may become a subject to litigation, government investigations or other proceedings that may adversely affect the business.
If the company fails to further develop its network of shared bikes and scooters, its business development efforts may be negatively impacted.
The company relies on a number of third parties and if they fail to provide their services in a timely and efficient manner, its operations may be negatively impacted.
If the company fails to successfully develop new offerings on its platform and enhance existing ones, the company’s operations can be adversely affected.
If the company fails to effectively manage complexities of its technology platform, its financial condition and results of operations could be adversely affected.
If the company fails to effectively manage its upfront pricing methodology, its financial condition and results of operations could be adversely affected.
Hurricanes, tornados, tsunamis and other natural, social or political disasters can negatively impact the company’s business and financial results.
The bottom line
To sum up, Lyft, accordingly targeting a $20-$25B IPO, according to people familiar with the matter, is likely to offer an unparalleled long run entry opportunity even if its shares’ IPO price hit the higher range of valuation estimates. According to my simple price-to-sales model, under this scenario, the shares could still carry up to 20 percent annualized return potential if the company’s revenue growth will sustain its high pace for a while. The important question, however, remains whether Lyft can achieve profitability. Despite a sophisticated pricing algorithm, the company will probably have a hard way turning its bottom line into the black as it has to face tough competition and varied regulatory demands in different jurisdictions. I believe the only thing that can help the company ‘lyft off’ red figures is its brand, which can become a powerful moat.
Disclaimer: Please note that this article has an informative purpose, expresses its author’s opinion, and does not constitute investment recommendation or advice. The author does not know individual investor’s circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
SAN FRANCISCO, CALIFORNIA – MARCH 7: The Lyft logo is displayed on a Lyft Hub on March 7, 2019 in San Francisco, California. On-demand transportation company Lyft has filed paperwork for its initial public offering that is expected to value the company at up to $25 billion. (Photo by Justin Sullivan/Getty Images)Getty
The first big IPO of 2019 is here. This year could set new IPO records (forsizeandlack of profits), and it all starts with Lyft (LYFT). The rideshare company is expected to trade within the next few weeks at a market cap between $20-$25 billion.
At the midpoint of that proposed range, Lyft earns my unattractive rating. It shares many of the same characteristics that have led me to warn investors away from otherrecent IPO’s: growing losses, low barriers to entry, poor corporate governance, and an unrealistically high valuation. These factors make Lyft this week’sDanger Zonepick.
No Network Effect Means No Profits
The two things everyone knows about Lyft are that it is growing very fast and losing a lot of money. Bulls will argue that, even if profits aren’t coming yet, Lyft’s growth puts it on the path to profitability. Their theory is that as Lyft grows the number of riders and drivers on its platform, it builds a network effect that increases its value and gives the company a competitive advantage over potential new entrants. A platform with more drivers has greater value to riders, and a platform with more riders has more value to drivers. Therefore, in theory, if the first movers attain a dominant share of riders and drivers, they build formidable barriers to entry for new entrants into the market.
Facebook (FB) is an excellent example of the power of network effects. People might not like Facebook’s privacy policies, but they join and stay on the social network because that’s where all their friends are. What’s the use in posting pictures for no one to see? Accordingly, the more people on FB, the more valuable FB is to its users. The more users on FB, the more money it can make advertising to them.
As FB makes tons of money in advertising, they offer new features to attract and retain new users. That virtuous cycle goes on while new entrants have to suffer losses as they attempt to reach the critical mass of users needed to become profitable and, hopefully, competitive to FB. The power of Facebook’s network allows it to keep growing and maintain a dominant position over competitors like Twitter (TWTR) and Snap (SNAP).
There are two key reasons why Lyft won’t benefit from a Facebook-like network effect:
Low Switching Costs: It is easy for both drivers and riders to use multiple ridesharing apps. Roughly70% of driverswork for both Uber and Lyft, and smaller services such asJunohave piggybacked off that network. The only switching cost involved for users of these platforms is the time it takes to close one app and open another. Switching cost are inconsequential for drivers too, especially for new rideshare apps that can use driver ratings from Lyft and Uber as a lower-cost way to screen drivers.
No Scale Effects: The bulk of Lyft and Uber use comes within a single city. Lyft states in its S-1 that 52% of its riders use Lyft to commute to work. The localized nature of the ridesharing industry means that competitors can make inroads by focusing on a single city. If a startup can attract enough riders and drivers in a single city, it doesn’t matter if Lyft has a superior network nationwide.
These two factors will make it difficult for Lyft to build a network effect that gives it a sustainable competitive advantage or the ability to make money.
Growing Losses Reflect No Network Effect
The scale of Lyft’s losses is staggering, even accounting for the structural problems it faces. The company’s net operating profit after tax (NOPAT) was -$953 million in 2018, a 38% increase from its $691 million loss in 2017. No IPO in recent history can match those losses. The closest,Snap(SNAP), lost $498 million the year before its IPO, or roughly half that of Lyft.
Figure 1: Lyft Revenue and NOPAT Moving in Opposite Direction
LYFT Rising Revenue and Growing LossesNew Constructs, LLC
Figure 1 shows that Lyft grew revenue by 104% in 2018, but made no progress on its path to profitability.
Investors Should Be Skeptical of Lyft’s Reported Market Share
Early in its S-1, onpage 2, Lyft claims it has a 39% share of the U.S. rideshare market, up from 22% in 2016. Several news outlets have treated that number as fact, but there are three reasons why investors should be extremely skeptical of Lyft’s self-reported market share number:
Conflicted source: the results come from Rakuten Intelligence, which is also a major investor in Lyft. Rakuten clearly has a financial interest in making Lyft look better ahead of its IPO.
Incomplete: the 39% only accounts for Lyft and Uber. It ignores smaller companies, such as Juno, that have a non-negligible share of the market in certain cities.
Cherry-picked time frame: the data only covers the month of December. With people travelling or going to holiday parties in December, rideshare usage for that month is probably not representative of the rest of the year. In addition, choosing a shorter measurement timeframe allows Lyft to boost its self-reported number by offering steep discounts and incentives in December.
A more reliable market share analysis comes from data companySecond Measure, which puts Lyft at a 29% share of the U.S. market compared to 69% for Uber and 3% for all others. Second Measure’s data put Lyft at just over 15% market share in 2016. Lyft is gaining market share as it claims, but at a slower rate than its self-reported numbers suggest. In addition, Second Measure’s data suggests that the bulk of Lyft’s gains came in 2017 during the#deleteubercampaign. Meanwhile, the company’s market share in 2018 only improved by 3 percentage points year-over-year.
Lyft wants investors to believe that it is on pace to achieve market share parity with Uber in the near future, but third party data suggests it’s still a distant second.
Low Barriers to Entry
Even if we could trust Lyft’s market share number, the question becomes, “so what?” If Lyft is able to capture a large portion of the rideshare market by operating at a loss, the only way investors can profit is by selling to greater fools. Ultimately, the company needs to be able to raise its prices, lower costs, shrink the cut of proceeds it gives to drivers, or all three in order to generate sustainable profits.
However, if either Lyft or Uber attempt this strategy, they only make it easier for new entrants to siphon away riders and drivers. If anything, Lyft and Uber have paved the way for fast-follower competitors by establishing the rideshare market. For example, Juno has quickly established a decent foothold in New York City in part bypiggybacking on Uber and Lyft’s vetting of drivers, i.e. only accepting those which receive a suitable rating, and thereby lowering its employee (driver) acquisition costs.
Further, start up costs for the single-city focused firms, like Juno orBubbl, are already quite low. If Lyft and Uber raise prices, new entrants will also enjoy higher revenue and even lower start-up costs. Consequently, we think Uber and Lyft can expect an onslaught of competition in every major city when they can no longer afford to burn millions of dollars a year and must operate as a going concern.
Raising Money Is Not A Sustainable Competitive Advantage
The only competitive advantage that Lyft can claim at the moment is the ability to raise capital. With$4.9 billionin capital raised prior to its IPO and $2 billion of cash on its balance sheet, Lyft can afford to operate at a loss for longer than potential competitors. Lyft and Uber presumably believe that their cash piles and ability to raise future capital will scare off smaller competitors and allow them to establish a sustainable duopoly in the U.S.
Even in a duopoly, Lyft is at a significant disadvantage to Uber, which has raised over$24 billion. In addition, Lyft and Uber also face potential competition from well-funded international companies like Didi, as well as larger companies that may attempt to break into the rideshare market, especially companies such as Waymo (GOOGL) and General Motors (GM) that are developing self-driving technology.
Not Even Lyft Expects Profits
Most companies with Lyft’s profile of rapid growth and high losses claim they are building their customer base through high sales and marketing spending, and when they reach a certain scale they can cut back on that spending to achieve profits. That answer is typically nonsense, but it’s especially unrealistic for Lyft. Even if the company cut its sales and marketing costs to zero, it would still have lost $149 million last year.
Lyft’s own accounting suggests that it doesn’t expect to earn profits anytime soon. For example, management assumes that it will not realize the benefit of its largedeferred tax assets(perhaps the only benefit of large cash losses) when it discloses a full valuation allowance against those assets: Frompage 93:
“We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized by way of expected future taxable income in the United States.”
In accounting speak, Lyft is saying that its deferred tax assets are presently worthless because the company doesn’t expect to turn a profit in the foreseeable future.
Cutting Out the Drivers Doesn’t Solve the Profit Problem
Lyft talks a lot about the importance of drivers, but they clearly foresee a future where they can cut them out of the equation. Lyft spent $250 million (9% ofinvested capital) in 2018 to acquire the bikeshare company Motivate, and they repeatedly use the term “Multimodal Platform” to describe themselves in their filing. Figure 2, taken directly from Lyft’s S-1, shows how the company conceives of its platform beyond the drivers.
Figure 2: Lyft’s Efforts to Eliminate Drivers
Lyft’s Platform ExplanationNew Constructs, LLC
Lyft claims bike, scooters, and even public transportation as a part of its platform, but the most critical part of Figure 2 is autonomous vehicles in the far right corner. Self-driving cars are often presented as the silver bullet that will turn ridesharing platforms into profitable enterprises.
At first glance, this theory makes sense. Currently, drivers claim ~71 cents for every dollar spent on Lyft’s platform.If all that money went to Lyft instead, it would earn substantial profits.
However, this overly simplistic model doesn’t translate into reality. Self-driving cars would cut out the need for drivers, but they would add new costs for maintenance, R&D, and insurance, as well as much higher initial capital requirements. Further, Lyft remains vulnerable to competition pushing down prices and margins unless it develops proprietary technology with which no one else can compete.
Lyft seems to recognize that it’s unlikely to be a leader in self-driving tech due to disadvantages in resources and scale compared to Uber, Waymo, and GM. Consequently, the company has focused on partnering with leaders through itsOpen Platform, which allows other companies to deploy their self-driving vehicles on Lyft’s platform.
This strategy reduces the costs to Lyft, but it also reduces the reward. If, for instance, Waymo develops self-driving technology at scale, it could simply license that technology to all rideshare companies and earn a significant cut of each ride. In effect, Waymo replaces the driver in this situation, while the rideshare companies remain as relatively undifferentiated middle-men.
Bull Case Doesn’t Hold Water
The most plausible bull case for Lyft at the proposed IPO valuation is that a company like GM (which is a major Lyft investor) builds self-driving tech and decides to acquire Lyft to monetize that technology. However, it’s hard to imagine that GM would pay $20-$25 billion for Lyft, or any more than the ~$3 billion Lyft spent to get where it is today.
Specifically, if Lyft has raised $5 billion in capital, and it still has ~$2 billion in cash, then why wouldn’t GM, or any other potential acquirer, consider $3 billion as the maximum amount it would need to build out its own rideshare business? And, if it can build its own rideshare company for $3 billion, then why pay any more for LYFT?
I struggle to see how GM would justify paying $20-25 billion for Lyft. After all, the ground that Lyft and Uber have plowed to build driver networks and get consumers on board with ridesharing only makes replicating their success easier and cheaper.
I can’t discount thestupid money riskof a company overpaying for an acquisition, but it’s hard to build a sound fundamental case for anyone to acquire Lyft at its current valuation.
Hidden Liabilities Further Raise Risk
Investors should be aware that Lyft’s reported valuation ignores significant hidden liabilities in the form ofemployee stock optionsand restricted stock units (RSU’s). These hidden liabilities represent shares that are not included in the official share count but will eventually vest and dilute existing shareholders.
Onpage 36of the footnotes (page 256 overall), Lyft discloses 13.8 million outstanding employee stock options with a reported intrinsic value of $609 million. However, the company’s valuation of these options is based on assuming the fair value of its stock is $47.37/share. I don’t yet know Lyft’s official IPO price, but at the rumored valuation of $20-$25 billion, its shares would be worth ~$90/each, or roughly double the fair value assumption. At the IPO share price, Lyft’s stock option liability is more like~$1.2 billion.
In addition, Lyft discloses that it currently has 46 million (~19% of shares outstanding) RSU’s outstanding. Of this total, over half (24 million) were granted during the past year. As with the stock options, Lyft values these RSU’s at $47.37/share, giving them a reported intrinsic value of $2.2 billion. At the rumored IPO valuation, these RSU’s would be worth over $4 billion.
Investors should be aware that these RSU’s represent a significant deferred cost that will hit the income statement after Lyft completes its IPO. The company estimates that it has $1.3 billion in unrecognized compensation cost related to RSU’s, but that number almost certainly understates the true amount. When Snap went public with a similar valuation and a similar number of RSU’s (~20% of outstanding shares), it recorded $2.6 billion in stock compensation expense in its first year as a public company.
Combined, Lyft’s stock options and RSU’s represent over $5 billion in future dilution, or 20-25% of the proposed market cap of the company. Investors who care about fundamentals should deduct this $5 billion out of their valuation models for LYFT.
Valuation Already Assumes the Best Case Scenario
Even before accounting for these hidden liabilities, it is quite difficult to create a plausible scenario for future cash flows that justifies the proposed IPO valuation. Below, I model three scenarios for Lyft’s future cash flows:
High Competition Scenario: Lyft is barely able to scrape out an economic profit as any price increase opens the door for new competitors. The company earns the same razor thin margins that airlines had prior to industry consolidation. If Lyft achieves 4% pre-tax margins and grows revenue by 25% compounded annually for 10 years (~$20 billion in year 10), it has a fair value of $1.6 billion today, over 90% downside from the proposed valuation.See the math behind this dynamic DCF scenario.
Duopoly Scenario: Lyft and Uber are able to control the U.S. market and keep out competitors, perhaps through some form of regulatory capture. This control of the market allows them to set prices at a profitable level, although they still face constraints, as regulated firms, as to how high they can go. If I use the same revenue growth scenario and double pre-tax margins to 8% (more comparable to airlines after consolidation), Lyft has a fair value of $8.5 billion today, about 62% downside from the proposed valuation. See the math behind thisdynamic DCF scenario.
Self-Driving Scenario: What would Lyft be worth to GM or another company that develops self-driving technology? In this scenario, we optimistically assume, for arguments sake, Lyft captures a significant amount of the value from self-driving technology. If I keep the same revenue growth and double Lyft’s margins again to 16% (closer to an online platform like EBAY), then the firm is worth its $22.5 billion valuation.See the math behind this dynamic DCF scenario.
Figure 3 shows just how optimistic the growth in the self-driving scenario is compared to Lyft’s present cash flows.
Figure 3: Lyft’s Present NOPAT vs. Future NOPAT Required to Justify Valuation
Expectations Baked into Lyft ValuationNew Constructs, LLC
To say Lyft is priced for the best-case scenario is an understatement. A $22.5 billion valuation assumes the company either magically becomes highly profitable while maintaining its high growth rate for a long period of time or convinces someone to buy it for far more than it would cost to replicate what they’ve done.
Dual Class Shares Hurt IPO Investors
In case IPO investors need another sign that LYFT is a bad deal for them, they should review the voting rights (or lack thereof) of the IPO shares.
Lyft plans to list shares using the dual class structure that has become the default for recent IPOs. The company’s founders will receive Class B shares that have 20x the voting rights of the Class A shares sold to the public. I showed how the dual-class structure that prevents investors from holding executives accountable contributes to the dysfunction and falling share price at Snap Inc. (SNAP).
Lyft’s S-1 currently does not specify what the ratio of Class B to Class A shares will be after the IPO. It may be that the founders will not have complete voting control over the company, but at the very least they will have a disproportionate influence that will make it difficult for the average investor to have a meaningful say on corporate governance.
This poor corporate governance, combined with the unrealistic valuation and total lack of expectation for future profits, suggests that Lyft has little interest in creating long-term value for investors. Instead, this IPO is a way for employees and early investors to cash out and leave people who buy the IPO holding the bag.
Critical Details Found in Financial Filings by OurRobo-Analyst Technology
As investorsfocus moreon fundamental research, research automation technology is needed to analyze all the critical financialdetails in financial filings. Below are specifics on the adjustments I make based on Robo-Analystfindings in Lyft’s S-1:
Income Statement: I made $92 million of adjustments, with a net effect of removing $42 million in non-operating income (2% of revenue). You can see all the adjustments made to LYFT’s income statementhere.
Balance Sheet: I made $776 million of adjustments to calculate invested capital with a net increase of $222 million. The most notable adjustment was $348 million inoff-balance sheet debt. This adjustment represented 15% of reported net assets. You can see all the adjustments made to LYFT’s balance sheethere.
Valuation: I made $1.5 billion of adjustments with a net effect of decreasing shareholder value by $1.5 billion. These adjustments represent 7% of LYFT’s proposed market cap.
Disclosure: David Trainer, Sam McBride and Kyle Guske II receive no compensation to write about any specific stock, sector, style, or theme.
Lyft does not count the driver’s cut of each fare as part of revenue. Instead, it discloses the total amount of money spent on its platform as “Bookings”. In 2018, Lyft reported $8.1 billion in bookings and $2.2 billion in revenue.
Ernst & Young’s recent white paper “Getting ROIC Right” demonstrates the link between an accurate calculation of ROIC and shareholder value.