Co-working office space firm WeWork is the latest new economy “unicorn” to prepare for a 2019 IPO, but after a so-far disappointing journey for two of this year’s biggest floats, Uber (UBER) and Lyft (LYFT), will investors be warier this time around?
Uber’s IPO in May was one of the most hotly anticipated of recent years but shares are still below the float price. Lyft listed before Uber and has struggled to match early expectations.
Social sharing site Pinterest (PINS) has fared rather better than the ride-sharing firms, while Beyond Meat (BYND) has been the surprise success story of this year’s floats, tapping into the growing demand for meat-free foods. Its first day of trading saw the biggest percentage gain for an IPO since 2000, reviving memories of the heady days of the dotcom boom. From a float price of US$25, Beyond Meat's shares hit US$235 in late July, a rise of 839 per cent.
Uber and Lyft disappoint IPO investors
Lyft got its IPO out before larger rival Uber at the end of March and despite high expectations, the company’s shares are trading below their initial price. Morningstar tech analyst Ali Mogharabi, who also covers Uber, was encouraged by the ride-sharing firm’s first results as a public company. Lyft raised its forecasts and Mogharabi thinks the firm can continue to take market share from dominant firm Uber in the coming years.
While Uber has first-mover advantage in the market, Mogharabi says, Lyft is sticking to its primary offering of cab journeys, rather than branching out into food delivery and logistics.
“We believe Lyft has accumulated valuable intangible assets around driver and rider data that will be hard for start-ups and newcomers in the ride-sharing space to replicate,” he adds.
Lyft is also investing heavily in autonomous vehicles, which could save the company money in the long-term. In short: without drivers to pay, Lyft’s costs fall dramatically.
Mogharabi argues that Uber shares remain undervalued, whereas Lyft shares are close to being fairly valued at current prices. He believes Uber Eats will be a strong source of revenue for Uber in the coming years, especially given its dominant position in many markets.
Analysts think the ride-sharing market worldwide will be worth US$411 billion by 2023, and Uber currently has 30 per cent of this market. Uber "cross-sells" its cab customers with Uber Eats, but faces tough competition in the US from the likes of GrubHub.
Beyond Meat share price up 570%
In a different sector, Pinterest is one of the last social media companies to go public: Facebook floated in 2012 and Twitter in 2013.
Unlike Lyft and Uber, Pinterest is now trading above its float price. While Morningstar analysts recently raised their fair value estimate for the shares from US$22 to US$24, this is still below the existing share price of US$33.
“While we don't expect Pinterest to displace online advertising behemoths Google and Facebook or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending, which we estimate is an addressable market of nearly US$500 billion,” Mogharabi says.
He also warns that Pinterest could get dragged into the worldwide row over user privacy that has led EU and US regulators to probe the likes of Facebook.
Beyond Meat is represented in the Vanguard US Equity Index, which contains 3,400 stocks. The tracker, which also holds Uber and Lyft, has the highest rating that Morningstar can assign to a fund, with a Gold Analyst Rating and five stars. The soaring share price perpetuates the idea that an IPO is a chance to make a quick buck on the back of early exuberance.
The problem with profits
WeWork’s imminent float highlights the dilemma for investors in heavily hyped IPOs: why should you back a firm that doesn’t make a profit? Uber, Lyft, Pinterest are not profit-making but investors are willing to bet on their long-term prospects. Morningstar analysts say they are confident that Uber and Lyft are “progressing towards” profitability.
In fact, investors are more focused on revenue growth than the lack of profits, and all the big names that floated this year have posted strong year-on-year gains in revenue.
Judging by the amount of venture capital WeWork has raised in funding rounds before its IPO, early investors are expecting a windfall when it floats. According to Pitchbook data, WeWork was valued at US$97 million in its 2012 funding round and now it’s worth around US$47 billion.
Often it’s hard for fund managers to jump on the bandwagon as many of the funding rounds for “the next big thing” are oversubscribed. Still, Fidelity, JPMorgan, T.Rowe Price are among traditional asset managers set to gain from the WeWork IPO.
With stock markets looking volatile again, founders bringing their companies to market face significant risks that the reality doesn't match the hype. WeWork will be an acid test of whether investors can still be seduced by the pre-IPO publicity - or whether the float will come to represent the peak of the Silicon Valley bubble. Either way, expect a deluge of media coverage in the run-up.
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