From the Desk of Ian L. Cooper
It’s likely to be one of the hottest IPOs of the year.
Over the last week, Lyft filed to raise up to $100 million in a public offering, and will soon list on the NASDAQ under the ticker, “LYFT.”
Anticipation is already running high. Investors are getting excited.
But as with most IPOs, we urge caution.
Oftentimes, it’s the little guys that get left holding the bag. Out of the gate, smaller investors will scramble to buy. Demand will outweigh supply.
All the while, average investors buying this IPO could be left holding the bag for a company that is not looking to dramatically increase sales, which greatly limits future growth.
But there’s an easier, proven way to make money from such names, which we’ll discuss in a bit.
Lyft IPO: What You Need to Know before Investing
If you take a look at Lyft’s S-1, we can see that the company’s list of users continues to turn higher. In 2018 alone, it had 30 million total riders across the U.S. and Canada.
Active riders increased 47% year over year in the last quarter of 2018.
At the same time, revenue is increasing.
In 2018, the company earned $2.1 billion. While that may not sound like a lot, we have to consider it’s a sizable jump from $1.1 billion sales of 2017, and $343 million sales in 2016. More than 200% growth in two years isn’t too shabby.
Unfortunately, there are red flags.
The company is bleeding cash.
While it managed to earn $2.16 billion in 2018, it also saw its net loss grow to $911.3 million in 2018 from $688 million in 2017. For comparison, Uber lost $1.8 billion in 2018. Worse, Lyft has already warned that it has “incurred net losses each year” since its inception, and “we may not be able to achieve or maintain profitability in the future.”
That doesn’t exactly instill confidence in potential investors.
There are also potential risks to the company, which it highlights in its S-1, as well.
For example, the U.S. government could force Lyft to change the worker status of drivers from contractors to employees, for example. Right now, drivers don’t get overtime or benefits, like health insurance, as contractors. Should that change, the company noted, it “could harm our business, financial condition and results of operations.”
There’s a smarter way to trade IPOs like this one.
How to Profit from Rich IPOs
We’re no strangers to making such calls to avoid IPOs.
When Twitter began trading, it was over-subscribed and over-extended. Without a profit, it hit the market at 70x sales with a wild $35 billion market cap.
That didn't stop investors from crowding the stock out of the gate, though.
After being priced at $26 the night before, the stock began trading at $45.10 a share before jumping to $50.09. Investors chased it, only to watch Twitter close the day at $44.90 – 73% above the IPO price. While the stock would eventually be chased as high as $75, once the hype died, Twitter fell to $30 a share.
When Groupon IPO’d in 2012, it was considered one of the hottest opportunities on the year. Analysts upgraded the stock. Investors rushed to buy, sending the stock to $31.14 out of the gate. It would lose 50% of its value that same month.
We have to consider that the little guys of Wall Street won’t be on the receiving end of substantial profits on the first day, if at all.
Most hot IPOs will be overpriced, and oversubscribed.
Your job is to be patient.
If you like the stock so much, have patience and wait for it to go down. You should be able to buy it at a much lower price several months down the road.
Or, you can take advantage of an ETF that moves higher with IPO excitement.
The First Trust US Equity Opportunities ETF (FPX)
Remember, the FPX tracks hot IPOs in their first 1,000 days of trading. By buying it, not only can you avoid paying gobs of money for IPOs that may or may not work out, but you’re also being exposed to multiple hot IPOs at the same time at lesser cost.
Plus, as you can see, the FPX never once took a hit on any of the failed IPOs either.
In fact, even with some of the most obnoxious IPO failures, the ETF managed to run from a 2009 low of around $11 to a recent high of $75. It’s a safer alternative than risking your hard-earned money to another potential flop. With the FPX, it doesn’t matter if the stock is hot or a dud, the excitement surrounding IPOs continues to send the FPX to new highs.