The first half of 2019 has been a big year for prominent tech unicorns to go public, and investors have been eagerly anticipating the IPOs of some of the most successful startups of the last decade. Uber, Lyft, Zoom Video, Beyond Meat, and Slack have all become public companies in the past few months. Robinhood, We Work, and AirBnB are also lining up to become listed in the next 18 months.
For the most part, the IPOs of the last few months have been a resounding success – with two exceptions. Both Uber (NYSE: UBER) and Lyft (NASDAQ: LYFT) held disappointing IPOs following months of hype. Lyft ended its first trading day 8% higher than its IPO price, but has drifted since then and is now some 144% below the price at which it went public. After trading lower on day one, Uber has regained ground and is now trading close to its IPO price.
By contrast the other prominent tech IPOs have all seen continued demand, with their prices now between 33 and 540% higher. Beyond Meat, Zoom and CrowdStrike have gained 540, 186, and 120%, respectively, in a matter of weeks. Even the least impressive, Fiverr, is still up 33%, having initially gained 89% on day one.
No Obvious Upside
Uber and Lyft chose the wrong time to become publicly listed in more than one respect. Firstly, they listed too late, leaving little obvious upside for investors. Uber is now a $77 billion company with no clear strategy to become profitable. Investors have been waiting a long time for a chance to invest, but now that they have it, the investment proposition really doesn’t look exciting. The service is widely available in cities around the world, leaving little obvious space for growth.
Cynics would say that in Uber’s case the IPO was merely a chance for early investors to exit – and they may be correct. Regardless of the motivation, Uber should have at least gone public with a clear route to profitability.
While Lyft has a lower valuation, it also faces numerous challenges, which we outlined before the company went public.
The fact that both companies listed within weeks of one another hasn’t helped either. Both companies do need to react to one another to fight for market share, but they have now created a dilemma for investors. Should an investor buy both or choose one? In many cases investors have probably opted to pass and rather look at one of the other more exciting IPOs. There are now other interesting and innovative companies with far smaller market caps to choose from.
Should Have Been Priced To Sell
Not only was the timing wrong – so was the pricing. The IPOs were priced at the highest level management and sponsoring brokers thought they could get on day one, without consideration for what comes next. The biggest supporters of both companies – those who bought on day one – are now underwater. Those who were more skeptical have had their doubts confirmed.
If these companies want to see continued investment demand, they will need to deliver good news – but that may be some time off. Uber Eats is even less profitable than its ride hailing service, meaning Uber’s gross margin is likely to deteriorate. In both cases, these companies should have listed when they were confident they would have a good story to tell in the following quarters.
With other recently listed stocks running so hard, investors may begin to view Uber and Lyft as bargains. They may well recover in the next few months, but in the longer term they will have to deliver some good news if they are going to see sustained demand from investors.