The US stock market enjoyed the success of the much awaited IPO from Lyft, the first of the startup unicorns to go public for the first time.
The market is expecting a slew of similar tech stocks to hit the market where in each of the companies that are still privately held and backed by venture capital firms, are worth over $1bn. The list includes names such as Lyft’s US rival Uber, online scrapbook company Pinterest and home-sharing site AirBnB.
The valuations being estimated for the companies are staggering. For example, analysts expect Uber to be valued at $120bn and more when it launches its IPO
Lyft currently has a market value of just over $24bn wiht its Nasdaq listed shares at $72 each. It market value is five times more than the British High Street stalwart Marks & Spencer. But compared to M&S, which was formed about 100 years ago, Lyft is just seven years old. The company however is yet ot make any profits for a quarter.
“I did a lot of research on private venture capital backed companies,” said Ilya Strebulaev, professor of finance at Stanford University. “We find that on average the unicorns are overvalued by about 50%.”
Lyft’s business model is based on the concept that having a car is expensive and with the growth in urbanization, more people are not buying vehicles but using ride hailing services to get around.
There is merit in Lyft’s business model, believes Rett Wallace, founder and chief executive of Triton Research. “The idea that you don’t have to have a car that you don’t use 95% of the time, and maintain, and insure and garage… transportation could be performed better than what Detroit has given us,” Wallace said.
But transportation as a service industry is still in its nascent stage.
“There isn’t a ton of evidence yet that it’s happening on any broad scale,” says Tom White, senior research analyst at DA Davidson.
Lyft’s rival Uber, which is slated to launch its IPO in April, is also a loss making venture like Lyft. The company however managed to bring down its losses to $1.8 billion last year from $2.2billion a year earlier.
Typically venture capital-backed businesses make losses “because they basically sacrifice profits to achieve very high growth or scale”, said Prof Strebulaev.
But “the question really for everybody and for investors,” he said, “is whether Lyft and Uber’s business model will allow them to convert these very substantial losses into profits at some point… and whether the market will sustain those losses.”
Wallace said: “We had a small taste of what a dotcom crash looks like in the Snap story.”
A big difference between the internet companies of the late 1990s and early 2000s, and now is seen by White.
“These companies are a lot larger and more established in a lot of ways,” he said. “They’ve been able to amass massive amounts of private capital and stay private for longer and achieve a size and scale that was pretty rare for a company that was about to go public the last time around.”
“In the previous cycle, the business models were more about promise of the future and the promise of the future revenues. Many companies today do have those revenues. It is now about a promise of future profitability which is very different,” said Prof Strebulaev.
Economics is one of the reasons that a slew of tech start-ups are planning to go public this year, believes Prof Strebulaev. The list of companies includes Uber, Pinterest and AirBnB, serviced office provider WeWork and messaging firm Slack.
“If there’s going to be a recession then the IPO window might close,” he said. “That happened, of course, in 2000 when the IPO window closed, when not a single company could go public,” he said.
(Adapted from BBC.com)