Why Lyft Could Plunge 42% In Warning Signal To IPO Investors

The major challenges facing Lyft are likely to push down the stock nearly 42% below its $72 a share offering price, according to a report by Seaport Global Securities, sending an ominous message to IPO investors and other money losing "unicorns” that plan to go public this year. "In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service," wrote Seaport Global analyst Michael Ward.

Lyft's shares as of today already have fallen about 18% below the $87 a share they opened at on their first day of trading on Friday. The shares fell below their offering price on Monday and Tuesday before hovering just under that benchmark today. Lyft's decline, and the prospect of further declines, could dampen enthusiasm for other highly anticipated IPOs, including ridesharing market leader Uber Technologies Inc., business communications tool Slack Technologies Inc., delivery company Postmates Inc., social media platform Pinterest Inc., and others.

Huge Downside For Lyft

(% Fall From IPO Price)

• IPO price: $72
• Analyst target: $42
• % decline: 41.7%

Source: Seaport Global Securities, per Barron’s

Seaport Global's Ward initiated coverage on Lyft shares at a sell rating, citing valuation as a major factor. His 12-month price forecast of $42 a share reflects a 42% decline from Lyft's offering price, and also a roughly 41% drop from where the stock was trading on Wednesday afternoon. At the core of Ward’s argument is that he isn’t a believer in Lyft's and other ride sharing companies’ narrative of the future. In that narrative, “transportation as a service” booms to a $1.2 trillion market and the traditional model of individual ownership is turned upside down. While he does expect the ridesharing market to grow with Lyft as a “prime competitor,” the analyst does not foresee any radical shift in consumer behavior. Instead, he says that ride-sharing will continue to serve as a “convenient supplement” to car ownership.

Other bears, including analysts at Guggenheim who initiated coverage on Lyft at neutral, agree that “too many big assumptions” are needed to “make a case for the stock,” per CNBC.

A new traffic tariff, or “congestion toll,” passed in New York may also be a headwind, increasing operating costs in key urban areas for Lyft, and soon-to-be-public Uber, per another Barron’s story.

Lyft's market value as of today was about $24 billion. On Lyft’s first day of trading, 14% of investors who traded on Robinhood, a popular app among millennials, bought shares, per Dr. Sahill Poddar, data scientist at Robinhood. Millennials have been avid buyers of tech stocks. But while bullish millennials and other investors have rushed to get in on the next-big shift in transportation, others warned against buying the new stock due to Lyft’s mounting losses and other factors.

While there are significant hurdles facing Lyft and its unicorn peers, investors in the long game may want to consider the fact that Facebook Inc. (FB), once down sharply from its IPO price, recovered and prospered. The tech giant successfully navigated the widespread consumer shift to mobile, and many investors who bought its narrative have made rich profits.