How to Trade the Lyft IPO

Unless you’ve been hiding under a rock, then you’re likely aware that Lyft went public.

Lyft began trading on the Nasdaq (ticker: LYFT) this morning, March 29, after completing its initial public offering process last night. Why is this significant? What does this news mean for you?

Maybe you’re intrigued by this news, but you don’t necessarily fully understand the implications of this announcement.

Turns out, Lyft’s incredible valuation means this IPO could be one of the most successful we’ve seen in recent years. That means it’s worth digging into this news.

Using what we know about Lyft’s financials and checking out a few similar cases, we can get a better idea of Lyft’s future after going public.

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Lyft IPO: What’s the Big Deal?

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Of course, a company as recognizable as Lyft going public is always newsworthy, but what makes this case particularly interesting? Why does Lyft’s IPO deserve your full attention?

There are several reasons why many traders are keeping their eyes on Lyft in the coming weeks.

Before we get into those reasons, though, here’s what you should know about Lyft’s current financials and the IPO itself …

Lyft’s Sky-High Valuation

If there’s one reason that Lyft’s IPO should be on your radar, it’s Lyft’s most recent valuation.

Lyft is what some might call a ‘decacorn.’ That’s just a new term used to identify startups worth at least $10 billion. In Lyft’s case, the company received a private valuation of $15 billion.

After its IPO, Lyft hopes to increase this valuation by another $9 billion to $24 billion. This would set Lyft up to have one of the most successful IPOs in quite a while.

Lyft IPO: The Numbers

Before I share my expectations, you should know what the company itself hopes to gain from its IPO.

The bankers in charge of Lyft’s IPO valued shares at $72 after the market closed on Thursday evening. It’s possible (some say likely) the stock could open higher.

This pushes Lyft’s potential valuation up to about $24 billion and sets them up to raise around $2.1 billion.

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While this would be far from the largest IPO of all time (Alibaba raised $25 billion), it’s definitely up there.

After the initial public offering, Lyft will have around 285 million outstanding shares.

Why Now?

Lyft is successful in generating private investments, so why would the company go public now?

It’s a fair question, and the answer is simple enough: Lyft needs to raise money. Does that mean the rideshare giant is in financial trouble? Not necessarily.

Is Lyft in Trouble?

Going public can seem like a red flag to some. Day traders, in particular, have firsthand experience dealing with volatile penny stocks that often go public as a final desperate move to raise money.

It doesn’t help that Lyft is burning through its cash flow. Like its larger counterpart, Uber, Lyft is still experiencing large losses. In 2018, Lyft doubled its sales to just over $2 billion, yet it lost about $911 million.

That doesn’t have to scare you away, though. The reality is that Lyft would more than likely be fine if it stayed private.

So, no, going public doesn’t mean the company’s failing. In this case, I believe Lyft is going public to raise cash to pay back private investors and increase cash flow.

When venture capitalists and other private investors put their money into these startups, they do so with the expectation that they’ll make more than their initial investment. And it’s time for Lyft’s investors to see some ROI.

Sustainability

Aside from paying back investors, Lyft stands to gain some financial stability from this IPO. As I mentioned earlier, Lyft hopes to raise around $2.1 billion. Sure, Lyft isn’t a profitable company, yet (they’ve had negative cash flow, $280.7 million in 2018). But this can give them plenty of room to grow and turn things around.

Learning From Past Examples

It’s pretty much impossible to know for sure what Lyft’s IPO will look like. But what we can do is look at past examples to make a more accurate prediction.

I like to compare Lyft to three other startups that have already gone public: Snapchat, GoPro, and Yeti.

Snapchat

snapchat stock price since IPO
Snapchat stock price since IPO filing

Snapchat vs. Lyft: Check out how these two very different companies have very similar circumstances.

More than anything, these two companies are similar in that they’re both high-profile startups with high expectations and cash-flow problems.

However, I expect Lyft’s IPO to be different from Snapchat’s for one simple reason: Snapchat’s cash flow problems are much, much worse than Lyft’s.

Snapchat only managed to raise a sorry two years of cash flow when the company went public. Remember, if all goes well, Lyft stands to raise up to 10 years of cash flow. That gives Lyft a much larger window to grow.

Also, consider the fact that Lyft has a clear means of generating revenue. Lyft offers a paid service, Snapchat is completely free and faces much more competition than Lyft.

That said, I prefer to compare Lyft to the next two startups on our list.

GoPro

gopro stock price chart
GoPro stock price since IPO

GoPro, like Lyft, is a specialized company — it makes cameras. That’s it.

Traders didn’t expect GoPro to take off as it did. They thought GoPro was simply too one-dimensional.

Take a look at GoPro’s opening months, and you’ll see a different story. After opening at around $30, GoPro climbed to around $100 in just a few months. Then over the next few years, it steadily dropped to a current price of about $6.

Those traders might have been right … GoPro’s business model may not be sustainable. Those same traders might think the same about Lyft, but that doesn’t mean there won’t be opportunities.

Yeti

yeti stock chart
YETI stock chart

Here’s another company that specializes in a fairly niche industry. Yet, for some reason, Yeti repeatedly pops up on trader watchlists.

Why is that?

One reason is brand recognition. And traders love to keep tabs on popular brands.

Take a look at Yeti’s price history … It debuted at around $14 and, at the time of writing this, is sitting at just over $30.

There’s a good chance Lyft’s short-term chart will be similar. It’ll likely open with some volatility before stabilizing, then increasing at a steady rate.

Looking at these three companies, I’d expect Lyft to follow in the footsteps of GoPro and Yeti rather than Snapchat.

Watch Out for Uber

Lyft isn’t the only rideshare giant planning on going public. While it hasn’t set a date, Uber’s expected to go public later this year.

Uber is much larger than Lyft and has much more brand recognition. Remember how I mentioned earlier that Lyft’s 2018 sales grew to $2.2 billion? Well, Uber’s sales amounted to over $11 billion.

What does this mean for Lyft?

An Uber IPO could have a very positive impact on Lyft’s stock. It’s possible that Uber going public a few months after Lyft could cause a resurgence in rideshare hype.

Watch for news about Uber going public — it could very well cause Lyft’s stock to rise.

How to Trade the Lyft IPO

We can make our predictions about how the Lyft IPO will perform, but the reality is that betting on normal Wall Street is a crapshoot.

The Lyft IPO definitely has potential to take off, but trading based on hype and anticipation is very risky.

Instead, try focusing on trading via sympathy plays: stocks that are pumped up by association.

In this case, which stocks stand to benefit by being associated with the rideshare industry?

Let’s take a look at two in particular: HyreCar (NASDAQ: HYRE) and DropCar (NASDAQ: DCAR).

HyreCar is a service that allows people to rent cars to drive for Uber or Lyft and allows others to rent their cars out to Uber and Lyft drivers.

DropCar is a sort of on-demand valet service. Users can either hire someone to come pick up their car and park it at a nearby parking structure or hire a person to watch their car while they are at an event.

Both DCAR and HYRE are low-priced stocks that stand to see a lot of price activity in the coming weeks by getting caught up in the rideshare hype created by the Lyft IPO.

Trading the Lyft IPO directly might be an interesting thought, but sympathy plays are where many of the real opportunities are — that’s how I and many of my top Trading Challenge students are playing this Lyft IPO news.

Remember, trading these types of low-priced, volatile stocks can be very risky. To make the most of these opportunities, do your research and stick to your trading strategy.

Trading Challenge

Now you know the details behind Lyft’s IPO, but what do you do with this information?

My Trading Challenge is designed to teach traders and help them understand the fundamentals of day trading. You’ll learn how major news catalysts like this can impact stock prices and cause volatility.

Trading like a pro means knowing the fundamentals of day trading. From reading reports to identifying trends to analyzing market patterns, you’ll learn how to develop a solid strategy and think for yourself as you face the market.

Ready to learn more? Find out how news like this Lyft IPO can create intriguing opportunities. Apply for my Trading Challenge today!

What do you think is in store for the Lyft IPO? What are your exciting trade ideas? Leave a comment below!

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