Given the extensive media coverage of upcoming unicorn IPOs, we have been focussing on tech company valuations, using Lyft as a case study.
Key takeaway
Contact the author Tim Morrow
Lyft has been the first of a number of highly anticipated listings in 2019. The volatility in Lyft’s share price post listing has shown that the market has struggled to price Lyft. Valuation of companies in emerging industries will continue to be difficult for public market investors, particularly given the lack of comparable listed companies in these sectors.
Lyft lists on the NASDAQ making it the first of many highly anticipated IPOs in 2019
Note: All figures discussed relating to Lyft and other U.S. tech stocks are denominated in USD.
Improving equity markets since the beginning of 2019 have led to the window opening for tech IPOs in the U.S. Recent SEC filings have flagged IPO plans by multiple unicorns including Zoom, Pinterest, Uber, Slack and Airbnb. Interestingly, it seems Slack may follow the path of Spotify, opting for a direct listing on the New York Stock Exchange. Direct listing comes with its benefits and risks, suiting businesses that don’t need additional capital from the IPO process. Pintrest has also set its IPO price range at between $10.0 billion and $11.3 billion, which is below its last private pre-money valuation of $12.2 billion.
How has Lyft traded since IPO? Lyft priced at $72 per share, pops to $87 per share on opening day then retreats
Lyft listed on the 29th of March at $72 per share at the top of the revised higher pricing range. On the opening day of trading, the share price immediately popped to ~$87 per share on the day then closed at ~$78 per share. Since then, the share price has traded down to ~$67 per share, giving Lyft a market capitalisation of $19.3 billion. The decline in the share price was likely due in large part to the difficultly for public market investors to value the company. The ride-sharing giant is facing similar pricing challenges to that of Facebook when it had its IPO in 2012, which has since produced a significant return for investors. Lyft could continue to trade in a volatile manner due to its free float being only 11% as early investors are locked up for 6 months.
Fundamentally valuing a company in a new industry
Calculating Lyft’s ‘fundamental’ valuation begins with understanding the market it operates within and the road to profitability. It is clear that investors must agree with the bull case on ridesharing to invest in Lyft at such a substantial valuation. Aswath Damodaran, highly regarded Professor at NYU, outlines the story well in a recent blog post which compares two different concepts in finance – traditional valuation of a company and the traded price of shares on a stock exchange. He approached the Lyft story by breaking it into 5 main components which he saw come through in the prospectus:
Lyft will remain a U.S. transportation services company. The size of this market is estimated to be US$120 billion, double the size of the taxi market in 2009.
The US transportation services market will continue to grow. It is estimated that the market will double in the next ten years.
Strong market-wide networking benefits. Consolidation will occur in the ridesharing market due to the strong network effects of being a dominant player. Lyft is expected to be one of these winners – currently the company completes more rides per day than Uber in North America.
Sustained share of Gross Billings. Lyft currently takes ~27% of Gross Billings and this is expected to revert to 20% over time as new services are offered.
A shift of drivers to employees. As more and more individuals work for ride sharing companies, there will be a shift of these contractors to employees, which will result in a long-term EBITDA margin of 15%.
These beliefs all point to the fact that the ridesharing market is a scale game as originally identified by Uber when it commenced its spending spree land-grab. The combination of the above 5 factors and other assumptions produces at a valuation of ~$58 per share ($16 billion) in Aswath’s model, significantly below the current market price. Aswath makes the key point though that valuation and pricing are two different concepts. Aswath’s blog post regarding the valuation of Lytf can be found here.
Valuation vs pricing
Valuation of a company can be contrasted with market pricing of shares, which often do not match when considering high growth tech businesses. The pricing of Lyft is a difficult area for traditional investors given Lyft is yet to turn a profit, which means pricing can’t be derived through profit trading multiples. Therefore, investors must price with the positive metrics that Lyft has including: Gross Billings, Revenue, and Riders. Aswath presents a range of market pricings for Lyft from ~$5 billion to ~$37 billion based on comparable private market pricings of competitors.
Fig 1. Comparable companies operating metrics and multiples
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Fig 2. Lyft’s derived pricing from available comparable metrics
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Source: Musingsonmarkets
The final IPO pricing of $24 billion ($72 per share) sits in roughly the midpoint of the pricing range derived by Aswath. The forthcoming potential series of IPOs from tech companies will hopefully begin to shed more light on valuation and pricing of these unicorns, however the downround from Pintrest may begin to spook investors.
Source: TechCrunch, Crunchbase, Musingsonmarkets, CNBC