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 flotations, 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 $25, Beyond Meat's shares hit $235 in late July, a rise of 839%.
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 simple terms: without drivers to pay, Lyft’s costs fall dramatically.
Still, Morningstar analysts argue that self-driving cars are both a great opportunity and threat to Lyft and Uber, especially with Google and other cash-heavy giants investing so heavily in this area.
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 $411 billion by 2023, and Uber currently has 30% 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 $22 to $24, this is still below the existing share price of $32.
“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 $500 billion,” Ali 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.
Polar Capital Technology fund manager Nick Evans holds Pinterest, Uber and Lyft in his Silver-rated fund. The fund has reduced its exposure to the big tech names “in part due to softer growth rates and in part due to regulation”. Still, Microsoft and the FANGs are in the top five holdings and Pinterest is the 43rd biggest holding in the fund, according to Morningstar Direct data.
Beyond Meat is not held by any UK active funds but 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. That none of UK-listed US funds own Beyond Meat highlights the difficulty for active stock pickers and supports the argument for going passive in the world’s most liquid equity market. Still, the soaring share price perpetuates the idea that an IPO is a chance to make a quick buck on the back of early exuberance.
While fund managers say they don’t want to get caught up in the IPO hype, they are often in a position where they are buying stocks after some of the big gains have been made – in Beyond Meat’s case, in the days and weeks after the float. Its first results as a public company made it stand out among the big IPOs: it made a profit, albeit a modest one of $10 million.
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.
The manager of the Gold-rated investment trust Scottish Mortgage Trust (SMT), James Anderson, has often said unlisted companies are often more profitable for fund managers before they float than after. His trust does hold Lyft, but some of these shares are from before the company floated.
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 $97 million in its 2012 funding round and now it’s worth around $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.
The Janus Henderson Global Technology fund holds small stakes in Uber and Pinterest but prefers the so-called FANGs. Manager Alison Porter says it’s important for investors not to get carried away by the hype: "We think it’s important that investors take a more valuation disciplined approach in technology from here.”
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.
Philip Harris, fund manager at EdenTree, summarises this wariness on the part of professional investors: "Given the late stage of both of the economic and IPO cycles, investors should expect a lowering of the overall quality of new issues as private equity and corporate sellers take advantage of strong markets to offload their weaker investments at premium prices."
