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Lyft's tumbling stock an ominous sign

San Francisco

LYFT INC. fell below its initial public offering price of US$72 a share on its second day of trading, which is worrying for the stampede of unicorn companies planning to follow the ride-hailing business to the stock markets this year.

The IPO has become a sort of test case, not just for Lyft or rival Uber Technologies Inc, but also for a glut of highly valued startups such as Pinterest Inc, Postmates Inc and Slack Technologies Inc, that have signalled plans to list this year.

Getting Wall Street hyped for an IPO is a practised science, but managing expectations after a public offering is a game of market psychology that Lyft and its underwriters saw turn against them on Monday, said David Erickson, a finance professor at Pennsylvania University's Wharton School.

"I was surprised that it blew through the IPO price so quickly," he said. "While there was a lot of enthusiasm on Friday, it's obviously been dampened today, and it's hard to recreate that moment once you lose it, in the near term." Lyft worked hard to drum up that excitement ahead of last week's offering. It told prospective investors on the second day of a well-attended road show that the deal was oversubscribed. It raised price expectations from a range of US$62 to US$68 a share, finally opting for US$72.

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On Friday, the shares opened on the Nasdaq Global Select Market at about US$87 - 21 per cent above the IPO price. By the close of trading that day, the price was down to US$78. Lyft continued to fall on Monday to as low at US$69.12.

But, you also can't read too much into the first days of trading. It took Snap Inc four months to dip beneath its US$17 a share IPO price, and it's still below that threshold. Facebook Inc dropped below its IPO price on the second day of trading and had a rocky first year on the market before the stock took off.

Lyft worked with JPMorgan Chase & Co, which led the offering with Credit Suisse Group AG and Jefferies Financial Group Inc. The San Francisco-based company reserved a pocket of shares, called a "greenshoe", for bankers to help stabilise - and sometimes defend - the IPO price. "It's going to be a struggle today for the underwriters to keep it around the IPO price," said Prof Erickson, a former co-head of global equity capital markets at Barclays Plc.

They will all be watching anxiously over the coming days to see whether the stock recovers, said Tom White, a senior analyst at DA Davidson. "At an emotional level I'm sure the company and the bankers don't want to see it break the price that it went out at," he said. "It will take a couple of days before we get a clear sense of where it stabilises." Lyft is a model of the unicorn class of companies that secured valuations in excess of US$1 billion from private investors and will soon seek validation from the public.

These are high-growth companies, with even higher propensities to burn through capital, and they're built around compelling narratives of world-altering potential.

Lyft has said it can fundamentally alter transportation and eventually usher in a world of self-driving cars. The same can be said of Uber, which is expected to publicly file paperwork for its own IPO this month. Slack makes similar promises of reinventing how workers communicate and Postmates of how people shop for food and other goods.

At the centre of the debate is how to value a company that lost almost US$1 billion last year. Even after the declines, the market still values Lyft above its last private valuation. On a price-to-sales basis, Lyft's market cap reportedly far exceeds that of other Internet companies. BLOOMBERG

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