IPO Estimate & Review
- Taking a look at LYFT financials for the first time
- Review of Dropbox IPO and stock performance
Can the slow IPO market get a lift from LYFT?
Every year, the stock market generates millionaire/billionaires daily through initial public offering or IPO. $46.8 Billion flooded the IPO markets last year, with 191 companies having their market debuts in 2018 beating 2017 by 31. As of 3/4/2019, the markets have had 11 companies raise a total of $1.2 Billion which has a long way to go if it wants to beat the prior year amount. As one of the most anticipated IPO to hit the markets in 2019, LYFT filed its S-1 IPO filing on 3/1/2019 revealing its massive loss of nearly $1 Billion. Hearing about a company lose $1 Billion will make anyone nervous, except when they realize the massive growth LYFT has seen the last couple of years and is expected to see in years to come. Below, I will go through some of the numbers and my opinion on the potential for LYFT in the public markets, and how two recent IPO’s have performed since their debuts.
Lyft, founded in 2012 was launched as a peer-to-peer marketplace for on-demand ridesharing, similar to a highly popular competitor UBER. Lyft is currently the #2 ride-sharing app in the US, and they certainly are coming for #1 which shows in their increasing market share. LYFT hasn’t released new information regarding the valuation, shares offered, or pricing but we can expect LYFT to add a sizeable chunk to the amount raised in IPOs for 2019. The $100 million listed in its IPO filing is most likely a placeholder, as multiple sources have estimated figures above $3 Billion. They also did not announce any new plans from management regarding the use of proceeds from the offering. With most recently reported revenues of $2.1 Billion showing incredible growth since 2016 of 85% compounded annually, we can expect LYFT to report revenues of at least $2.7 Billion (being extremely conservative after revenue doubled in one year). Given this conservative estimate, I believe a revenue multiple of 9x is appropriate for a technology company with a growth profile like LYFT, given that UBER is expected to have a similar multiple (11.3 Billion * 10.6x = $120 Billion). This puts LYFT at an implied market cap of $18.9 Billion from a reported $2.1 Billion in revenue and $24.3 Billion at the conservative estimate revenue for 2019.
This type of multiple is unheard of for companies that are bleeding money but quite common for tech startups hitting the public markets. LYFT has more to offer than a growing revenue base, like the 39% share of the potentially massive ride-sharing market and still increasing while Uber’s US market share is decreasing. It’s also managed to increase its revenue per active rider from $15.88 in March 2016 to $36.04 in December 2018, and also increased its revenue margins from total bookings. Since LYFT generates revenue from service fees and commissions, they get a portion of the total booking. If a rider was charged $24 total, $3 as a tip and $4 as an airport fee then the total booking should be $24 - $4 -$3 = $17. LYFTs growth in revenue is attributed to this metric and has increased the margin from 16.8% in March 2016 to 28.7% in December 2018 due to increased services fees and commissions, improved efficiency and effectiveness of driver incentives that reduces the amount of incentives that have the effect of decreasing revenue, and reduced market-wide price adjustment promotions offered to ridesharing riders. LYFT also announced that 91% of its driver drive less than 20 hours per week in its IPO filing. If they can incentivize that 91 % to drive more, then this will unlock additional revenue growth. During a time when the ride-sharing market is receiving plenty of hype, LYFT emerged as the winner in its race with Uber to the public markets at a perfect time. Having the spotlight to prove yourself is a great opportunity for an underdog, as long as they deliver. I believe LYFT can be extremely attractive if it hits the public market at $25 Billion valuation, and I wouldn’t be surprised to see large returns to follow due to the hype surrounding it. This is a perfect time for the company to raise additional capital through the capital markets.
Below is a quick IPO review of Dropbox.
I selected to review the Dropbox IPO because it’s in one of the sectors I like to cover which is cloud. Today, knowledge and daily tasks live in the cloud, and DBX one of the central places to create, store and share this across all global platforms. They raised $756 million on March 23rd, 2018 by offering 36 million shares at $21.00 a share which put their market cap at a $9.2 Billion valuation.
They had a wildly successful market debut returning 36% at the close after reaching a high of $31.60. One thing investors focused on here was the lack of profit before going public in 2018 with reported operating losses of $114M, which had narrowed from a loss of $306M in 2015. Meanwhile, the growth that DBX offered was very intriguing. Revenue grew 84% from $604M in 2015 to $1.1B in 2017. Most impressively, DBX has seen its operating margin expand from 33% to 67% from 2015 to 2017, and its free cash from grow from -$63.9M to $305M in the same period. They had $430M in cash and cash equivalents with only $208.8M in total debt and $1B in assets. Noting all of this, DBX was quite an attractive IPO play not only from the growth prospects but also from a valuation standpoint as well. As of 3/23/2018, DBX had an 8.5x revenue multiple and a 31x free cash flow multiple, whereas their peer competitors were trading at a mean of 9.3x revenue multiple and a 37.5x free cash flow multiple. Obviously, these ratios would make Warren Buffet have nightmares, but these are not uncommon for growth tech stocks (Ever notice Warren Buffet doesn’t hold many tech stocks?).
With the SaaS industry expected to grow at a compound rate of 21.2% for 2018-2023 and impressive growth/valuation prospects, this was a great opportunity for DBX to hit the public markets. As a SaaS business model, DBX was a company that had growing recurring revenue as well as expanding margins and free cash flow, this was an easy home run to hit for the investment bankers. Investors weren’t the only ones looking to buy, as Salesforce Ventures entered into a private agreement to purchase 1.4% of Dropbox shares at the IPO price.
The lockup expiration occurred on 9/19/2018 after the company already reached an all-time high of $43.50 and is currently trading at $23.89 which is 13.8% above its IPO price but 16% below its debut closing. This price action was a classic example of going too far, too fast. After more than doubling from its listing price when it reached its all-time high, the stock had pulled back to this area which can be seen as an opportunity for the bulls of the stock.
