With Lyft now trading 20% below its offering price we can call it what it is, a failed IPO. My top tech manager, Tony Mitchell, made the right call to pass on Lyft’s IPO. I asked him for his thoughts on Pinterest and Uber.
Ken Kam: These IPOs are some of the most talked about since maybe Facebook & Twitter, will you be buying any of their shares at their IPOs?
Tony Mitchell: I can’t say that I will never own them, but at their expected IPO prices, I’m not interested in adding them to my portfolio.
Kam: Are they are overpriced?
Mitchell: In general, yes. All three are losing money – therefore, any price is actually speculative and in some cases that’s okay, but there doesn’t seem to be a clear path to profitability with any of these. Lyft has already proven that it was overpriced.
Kam: Why do you think that Lyft has already proven that it was overpriced?
Mitchell: The value (or price) of anything is only what the market will pay for it and the market is not paying what Lyft thought it was worth. Even when a company is profitable, not all companies trade at the same multiple of earnings; it trades at a multiple of earnings that the market will bear.
Kam: Do you think that Pinterest and Uber will trade like Lyft did?
Mitchell: I think we first need to separate Pinterest from Lyft and Uber as it is a bit different. Pinterest is not losing as much as the others, is a different business model and is not competing with the other two.
I like Pinterest more than the others, and I give them a lot of credit for pricing their offering less than the last private round was priced at. Because of this, I believe Pinterest will come out of the gates trading stronger than Lyft did and end the first couple of days up from its opening price instead of down as Lyft did.
However, like many other IPOs including Facebook & Twitter, I foresee Pinterest trading back down near if not lower than its IPO price within 12 months, unless it shows quick and sustainable progress towards profitability. Because of its unique IPO pricing, if it can show any progress, it may have built itself a floor, around its IPO price.
Kam: What do you think about Uber?
Mitchell: Uber will be an interesting animal in its first few days of trading, but like Lyft, I strongly believe that it will be available during the next year or two at a price below its IPO price. So why buy it now?
We already know the pain many investors are feeling over Lyft, and unfortunately, I see more pain ahead as I think there will be a rotation out of Lyft and into Uber.
Kam: Is there a price that you have in mind for any of these where you would jump in and buy?
Mitchell: I haven’t been able to determine that price yet.
I’m a long-term investor and I like to buy companies that I believe can double in a 3-4 year period. I’m not confident that will happen with any of these three, but I do give Pinterest the best chance and there may be a point that I jump in with Pinterest sooner rather than later.
Kam: Being a long-term investor wouldn’t you want to get in now for the future of autonomous driving?
Mitchell: I wouldn’t want to ride in a car without a driver anytime soon, so I have no desire to invest for that reason.
While I do believe that autonomous cars will be common in the future, we will see years of struggles to get it right. That is too much risk for me.
Kam: What about the idea of ride-sharing replacing car ownership? Doesn’t that make you want to get in now?
Mitchell: I think that trend is overblown! It is human nature to want to be independent and ownership of a car is the greatest independence that many humans have. The only reason many might give up the independence that comes from owning a car is to save money.
At the beginning of the 20th century, the automobile was a plaything for the rich. Henry Ford was determined to build a simple, reliable and affordable car, and he did this with his Model T. We are in a new cycle of disruption that makes it more affordable for those living in cities to walk, rideshare, or use modern mass transit to commute.
The problem is that we know that both Lyft and Uber are losing a lot of money and must raise prices. Once prices reach the level they need to be at for the business to be profitable, the cost savings from ride-sharing will not be as big as many expect.
Kam: Any last thoughts about these IPOs?
Mitchell: Yes, I wish that I had reason to like them more as I do like the business models and believe that each can be successful, but that doesn’t always make a good stock investment.
Early investors in Pinterest bought in at 17 and 72 cents (Bessemer Venture Partners and Andreessen Horowitz, respectively) and it was a great investment for them. But the problem with investing in them now is that most of the easy money has been made and all that is left is speculation that each will be a super success!
Lyft and Uber have similar stories. Private equity made most of the money from companies before their IPOs. With both companies, I think it is better to sit back and wait for a better buying opportunity.
Both Lyft and Uber are nothing more than cab companies that have stolen share from other cab companies because of lower pricing and an app. As pricing increases and other cab companies build their own apps, Lyft and Uber will find it has greater competition and less of an advantage. They are not only competing against themselves and other cab companies, but also against all other modes of transportation, and ownership or leasing of autos.
My Take: Tony brings up many good points and with the performance of his portfolio, (currently up 26% YTD vs. 15% for the S&P), I have to admit he’s been making the right calls.
Tony Mitchell’s Internet Fund has an 18+ year track record that extends through 2 market crashes, numerous corrections, and sector rotations. Over that period, Tony averaged 17.33% a year which compares well to the S&P 500’s 5.99% return for the same period. Over the last 15 & 10 year periods, Tony’s fund did better than the top U.S. equity mutual fund manager in Morningstar’s database.