Lyft went public this week. Why do companies such as Lyft keep going public without having any profit to show for it? The last time we saw this type of activity on Wall Street was during the dot-come bubble burst.
Lyft, Inc, was valued at $24.3 billion in the first initial public offering of a ride-hailing startup. Its main competitor, Uber, is expected to be valued anywhere from $76 billion to $120 billion. However, both companies are immensely unprofitable. How is there such a high valuation for companies that are losing money?
According to an article by Recode, “In 2018, 81% of US companies were unprofitable in the year leading up to their public offerings, according to data from Jay Ritter, an IPO specialist and finance professor at the University of Florida. That’s a statistical dead heat with the rate in 2000, the year the dot-com bubble burst, plunging the US economy into recession. It’s the only other time unprofitability was this high.”
Why do People Invest in Unprofitable Companies?
In the same article from Recode, Paul Condra, a lead analyst of emerging technologies at startup research firm PitchBook said, “As we’ve seen during most of the recovery period since the Great Recession, investors are not so margin-focused, but continue to put a premium on businesses with long-term future expansion or disruption potential.”
Essentially, investors focus on the future potential. The company may be unprofitable right now, but they believe with future service and product R&D, and eventually market entry, that these investments will pay off big. However, companies need to make sure they focus on what going public could mean for their culture and brand. Lyft has been on the NASDAQ for a little over a week. There are already reports of drivers, who power the app based service, on strike due to low wages, and unsatisfactory conditions. What are these types of stories going to do to Lyft’s IPO? Two days after Lyft went public, its IPO dropped below its initial offering price. However, I think it’s too early to make long-term conclusions on what Lyft’s stock price will look like two years from now.
How was Lyft’s Valuation Calculated?
With a company that has lost money every year and continues to remain highly unprofitable how is a valuation of $24.3 billion calculated?
According to Trefis Technology Company these are some of the key area that were looked at:
- Strong growth in active riders likely to continue. In 2017 Lyft saw over 100% growth in active riders and another 60% in 2018. Right now forecasts are projecting total rides to increase nearly 50% to over 900 million for 2019.
- Stable revenue per ride and growth in number of rides. Right now forecasting $12 billion in gross revenue for 2019.
- Comparative to Uber, Lyft had 100% revenue growth where Uber slowed down to just over 40% in 2018.
Other considerable factors:
- Lyft only operates in the United States and Canada leaving large growth potential internationally
- The company invests heavily in R&D towards autonomous vehicles
- Sustained strong revenue growth
Will the forward revenue multiple of 7.5x, projected by Forbes, look conservative in the coming years, or will Lyft be the start of the next great dot-come bust? Time will tell.