As we end the first quarter of 2019 with one of the best quarterly performances in equity markets since the end of the great financial crisis, the gates are open for a number of highly anticipated technology initial public offerings (IPOs) including Lyft, Uber and Pinterest.
All three ‘Unicorns’ have blown through the USD 1 billion valuation mark in private funding rounds but the move to the public markets is looking to be a severe challenge relative to companies’ most recent private asset raising.
Lyft, the US ride-sharing company, made its debut on 28 March 2019 at USD 72, a price that was raised during the book building process relative to the USD 62-68 indicative range when the deal was launched, as investors scrambled to avoid missing out on the hottest tech IPO since Snap in 2017. At USD 72, the company was valued at USD 19.7 billion – well ahead of the series I private funds raised in June 2018 that achieved USD 14.5 billion. Lyft’s last financial statements reveal a company with USD 2.2 billion in 2018 revenues and a USD 978 million operating loss. However hard we try to flex the revenue opportunity, we find it incredibly hard to foresee profitability for many years. It is absolutely no surprise that after a hype-induced binge on day one of trading, the shares are already 20% below the IPO price (as at 15 April).
The next wave of IPOs includes Uber and Pinterest. Uber has announced its range at just below USD 100 billion in total market value as it attempts to ‘ensure’ that the IPO goes well. Its prospectus strap line is ‘we ignite opportunity by setting the world in motion’. However, it also loses a lot of money; 2018 financials show an operating loss of USD 3 billion on revenues of USD 11.3 billion. These are huge numbers with little evidence they will reverse to profit any time soon. That is not to say we do not embrace or like the transport as a service (TaaS) theme but it is not clear to us how the landscape will evolve and whether this will be a ‘winner takes most’ market. In fact, there is much to suggest it will not be in spite of impressive ride sharing user growth.
The ultimate opportunity in TaaS is clear with estimates of a market size in the trillions of dollars, but the winners are not so obvious in our view. Uber would seem to have a better platform for success than Lyft, with better geographic diversification, as well as additional product sets like Uber Eats and Uber Freight, but only time will tell and these companies do not currently have the same flexibility to move the profitability needle around compared with the likes of Facebook or Amazon. Unlike Amazon or Facebook both Lyft and Uber (and the other private competitors: Grab, Ola, and Didi) rely heavily on both driver and rider incentives. In our view, the ability to offer such large incentives is due in part to the inflated valuations these companies have achieved in private funding rounds and the ability to use these (perhaps) irrational piles of cash to fund incentives. Without such incentives the economic advantage of moving away from car ownership towards a ride sharing model may not be so obvious but, again, only time will tell.
Pinterest is also a company that we believe may find it harder than anticipated to make ground at IPO. It is coming to the market with an anticipated valuation of about USD 10.5 billion fully diluted. This is well below its USD 12.2 billion last stage private funding round. We think that Pinterest is an interesting business with a strong niche opportunity, but the market still seems to want to see any social network as a Facebook challenger of some sort and we do not see that being the case here. We believe the evidence of Metcalfe’s Law (a concept used in computer networks and telecommunications to represent the value of a network) is clear and investors should look no further than the early public fortunes of Twitter or Snap for a sanguine reminder of how that goes.
We believe that public markets are getting the message slowly and certainly ahead of private funding where valuations have continued to remain very high. Early IPO trading for Lyft, Uber and Pinterest will likely go some way to dampen down private funding enthusiasm as well as reminding the market that ultimately, all assets need to stand up to scrutiny on an intrinsic valuation basis.