Did you buy any Lyft stock when it listed last week?
I hope not.
The IPO (initial public offering) price was US$72 per share.
It had a quick run-up after going live…reaching $85.38.
But the situation quickly turned sour, as I predicted on Thursday:
‘…the potential here is weighed down heavily by the risk of owning a terrible business.
‘Sadly, it won’t stop a mad rush of folks jumping into the IPO with wads of greenbacks in their hands.
‘You’ll likely see this stock flourish…at least in the onset.
‘Then as reality sets in…and the novelty loses its lustre…I expect the stock price to drop like a lead weight.’
Like a lead weight, indeed.
In two days of trading, LYFT stocks dropped from $85.38 to $69.01…a –19.2% tumble.
No surprise there.
And if you’d taken a peek at their books (or read my Money Morning NZ on Thursday), you’d have seen Lyft for what it is — ‘…a limping money pit. And at a $25 billion targeted valuation on just $2.1 billion in revenue, Lyft is an expensive limping money pit.’
But in today’s world, companies don’t need to make money to make it on the stock market. They don’t even need a unique idea…Lyft’s sure isn’t.
They simply need good optics and believable hype.
That’s why I can’t point to Lyft’s stock falling to a reasonable valuation…because there is no reasonable valuation for the new wave of tech unicorns!
It’s a weird, irrationally exuberant market.
But let’s see how Lyft would stack up if we were to analyse it like a normal company.
The P/E ratio
The price-to-earnings ratio is the quick and simple tool for investors to value a stock. You’re basically looking at a stock price compared to how much that company makes.
The way you do that is by dividing the current stock price by the earnings per share (normally listed on whatever website you use to check stock prices).
The lower the number, the better.
Spark New Zealand [NZX:SPK], for example, runs a P/E of about 19 (stock price $3.83/earnings per share of $0.199).
But Lyft can’t be measured this way. It doesn’t make any money. It has negative earnings.
So earnings per share end up being –$3.20 per share. That sends the P/E ratio off into infinity…
But let’s say that Lyft breaks even and works its way up to a $0.01 earnings per share. At the current stock price of $69.01, the P/E ratio would simply be 6,901.
The average range for P/E ratios in the market is 20 to 25.
In other words, even if you give Lyft a huge head start by imagining that they can break even, the stock is still 250 times more expensive than your average stock.
The P/S ratio
Okay, so no luck with the price-to-earnings ratio.
Let’s try an alternative: the price-to-sales ratio.
This one tends to work better for companies not yet breaking even. It’s calculated by dividing market capitalisation by its annual revenue. Lower is generally better.
In the case of Lyft, the market cap is currently $22.25 billion and its annual earnings are $2.16 billion. That gives you a P/S of 10.3.
Sticking with Spark, their P/S is 1.93.
Or if you want to compare unicorns to unicorns, Amazon [NASDAQ:AMZN] has a P/S of 3.83.
So, again, Lyft misses the mark.
But as any investor will tell you, these ratios can’t always be compared to other businesses, even businesses within the same industry…so take it with a grain of salt.
The P/B ratio
Let’s give Lyft one more chance to prove its worth. Let’s try the price-to-book ratio.
This one is a bit more convoluted to calculate, but basically compares the assets and liabilities of a company versus its stock price. Here’s how it’s calculated:
Share price / (Total stockholders’ equity / Number of outstanding shares)
Sadly, Lyft can’t be calculated this way either…
The company’s simply haemorrhaged too much money to make the math a positive number.
Total stockholders’ equity is about $2.9 billion in the red. That sends the book value negative…and the P/B ratio into infinity and beyond.
The truth is, unicorns like Lyft are simply unanalysable. Their businesses don’t conform to the traditional measures of success (like profit).
Instead, they explode like a geyser of emotion, hype, and techie hysteria.
Pumped up by millions of investors…all trying to grab a piece of the next Amazon.
But I’ll tell you here — Lyft is NOT the next Amazon.
It’s simply a small group of Jeff Bezos-wannabes who saw their shot to join the nine-digit club and took it. They listed the company and got mind-blowingly ‘rich’ overnight through their share ownership.
But now their newfound ‘wealth’ depends on their ability to unload those shares…
And how do you think it will play out when that happens?
Hard to see a good ending there…
Editor, Money Morning New Zealand