Lyft and Uber: Trading the IPOs
Featuring Max Wolff
Published on: May 13th, 2019 • Duration: 18 minutesMax Wolff, co-founder of Multivariate, takes a deep dive into the current state of the IPO market and compares it against the IPO stampede of the dot-com era. In this interview with Justine Underhill, he discusses why IPO valuations are so extreme, notes the impact of companies staying private for longer, and reviews why he suggests staying away from overvalued IPOs. Filmed on May 9, 2019.
JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today we're sitting down with Max Wolff of Multivariate. Great to have you back.
MAX WOLFF: Always my pleasure, thank you.
JUSTINE UNDERHILL: So today we're going to be talking a little bit about the IPO market, and what a market it's been recently. Could you give us a little bit of background as to why you're saying that this is an IPO onslaught, and what are some of the major IPOs that you've been looking at?
MAX WOLFF: Sure, so great questions-- let me take a step back to try to take two steps forward. So we've basically seen some developments in late-stage private companies over the last 10, 15 years even. They ebb and flow, but they've basically been the trends. And those trends are companies staying private a lot longer, becoming much larger in their private incarnations, and also in sort of an emerging asset class, where buying and selling the shares in pre-public or private companies has become a much bigger business, in part because the companies are bigger, in part because there are more people interested in getting access before the IPOs.
And if nothing else, in part, just because, if you stayed private that long, you create problems for your employees, who are ultimately building the company. So I start working for you in the traditional sort of Silicon Valley dream story. I'm 22, 23, 24. My salary is mediocre, especially for the cost of living in places like San Francisco or New York, where-- not exclusively, but a lot-- these guys are based, these men and women are based. And so fast forward, my company's successful, it's seven, eight, nine years later.
I'm still making $150,000 a year. And on paper, I'm worth $20 million. But I can't pay off my student loans. I can't really buy a house. I can't even rent the house I want. I can't have the vacation I want. Or quite frequently, sadly, I'm getting divorced, and we have one marital asset. And that marital asset is my nonpublic shares. And I want to find a way to get some liquidity for those, so lots of different reasons.
But big, long story here, people end up wanting these companies. And so they have an idea about them, which means the hype, the build-up, the tease, can be five years, instead of a short IPO period. They've been in some unregulated IPO process, a lot of these names, for a while. What's become more interesting to me, as sort of an analyst and an active advisor in the space, is that their valuations have become very aggressive.
So historically, and in most reasonable business models or valuations you'd attempt, an asset that's illiquid-- you can't sell it for money easily or cheaply when you want to-- and an asset that's opaque-- you really can't tell what's going on with the company or get a great handle on what it's worth-- those usually are a discount. So the joke is, if I'm selling you a wonderful gift in a bag that you can't return, you're going to demand a pretty good price, or you have to be an unusually trusting soul. And being an unusually trusting soul in the marketplace is not necessarily always that sort of stuff of happy endings. So it's risky. But we had a weird thing. So the ability to imagine this boundless future has started to command a premium.
What do I mean? These illiquid and opaque private names have become more valuable, in many cases, than public markets will accept. And so the response was, well, just wait until you'll finally be understood. And then when you run out of time or you get more greedy than you are needy to be understood, you go public. And that's happened now, especially because we're obviously in the late, late innings here of a long bull market, and people are feeling like, let's get out when the getting's good. And I think it's going to test the disconnect between what people who don't know what they're buying are willing to pay and what people who do know what they're buying are willing to pay. And that is what an IPO determines.
JUSTINE UNDERHILL: Do you think that this is substantially different from the IPO boom of the late '90s? Specifically because these companies have been private for longer, is it maybe easier to tell what they're worth?
MAX WOLFF: Yeah. So on the good news, once you get information, if you get information, there's more and better information. And it stretches back further, so much better information. The flip-side is, the growth cycle tends to decelerate, and so you're paying a premium for a growth company, which in many cases may be later in its growth stage. And which people have just begun to wrap their heads around, the tax base is increasingly defined by a very small number of very large, very powerful companies.
So people have this imagination of the startup landscape, of all kinds of smart young women and men leaving school and having a brilliant idea and building it into a product. But actually, the tech landscape is dominated by near $ 1 trillion valuation behemoths, your Apples, your Googles, your Facebooks, your Amazons, who aren't particularly keen on upstarts disrupting them, who have huge cash hoards to Dubai, what looks like a threatening business model, and who have all the returns of global scale, endless cash, and brand recognition. So actually, there's more and more people at higher and higher valuation trying to grab an increasingly slippery ring.
And that hasn't done anything to cool public excitement, but it has done something to make this a real winner take-all business. And that gets sort of tested when you come public. Because when you come public, the secrets have to become disclosures or you're a criminal. And the liquidity is, every 9:30 AM to 4:00 PM, except for a few holidays, you are going to be judged and repriced by hopefully an active market. So short-term buffeting about occurs, and you get the scrutiny of a different grade and class of investors. And the big issue is, everyone who feels like they're inclined to take a look at what you're up to can get a lot more information about what you're doing.
JUSTINE UNDERHILL: Now, we have seen clusters of IPOs happen before in this bull market. Do you think that this cluster is potentially different and that it does signal we're in the late innings and that this could be coming to an end?
MAX WOLFF: Yeah, I think you're sort of seeing now the platinum crop in web 2.0. So if you think about the most discussed, most sort of scaled, everyday names in the space-- names like Slack coming, Pinterest just came out, Lyft just came out, Uber coming out-- like you're starting to get all the big names-- Airbnb, right? After these, the next crop is less well-known. It's more of a traditional-- so we're not talking the decacorns. They call them decacorns sometimes, the $10-plus billion valuations.
So this is the big crop. And obviously, they've decided that the timing is good, the appetite's there. Because IPOs, the IPO window opens and closes. How successful and how many IPOs there are is always a pretty good test of two things-- how desperate people are for cash-- that's part of the reason you go-- or how good they feel the market's timing is for a risk. The newer you are, the less I know about you, and therefore the more risky. So yeah, the newer you are, the more risky you are by definition, because I don't know much.
JUSTINE UNDERHILL: Now in terms of how to play this market, are there particular companies that you've been looking in that?
MAX WOLFF: Yeah, so the sort of thing that will make a lot of people annoyed at me, but I'll say it anyway, is, unless you feel like you really know a company and you really understand the space they're in, generally buying IPOs not a good idea. So people love it and it's exciting. And it's a great story to be a part of, and a lot of people like to buy IPOs in companies that they have a relationship with because they use the product. It's why there tends to be more hype around what we call B2C than B2B names. So B2C, business to consumer, that's sort of a household name company, as opposed to business to business.
So if you look at the excitement around a company, particularly one that's been controversial that a lot of people know. So that's really maybe more like your Airbnb a little bit, your Uber, your Lyft, so part of your life, if nothing else part of the apps on your phone that you probably use, or most people probably use. They get even more hyped because people have strong opinions. Oh, I used it and the driver cursed at me. Or I used it and it's great. Or my car broke down and I would have walked 10 miles in the rain if it weren't for Lyft or Uber. So people just have a personal visceral experience with them.
But generally, what an IPO roadshow is is a giant infomercial for something you don't know much about and you couldn't get. And so it has all the hallmarks of a kind of pump scenario, pumping up the value. And this is the pattern that I was most interested in. A lot of these guys, you can't sell the shares if you're an insider for six months. So a lot of them, you have a second bite at the apple, about six months after they go public, when you actually know how they're doing.
You've seen two earnings reports. You've seen them surge and then slide a little bit, which is a common pattern. And then you can buy them six months and a day later with full information, often at a bit of a discount. So unfortunately, pretty often at a discount to the IPO price, but definitely a discount to the first week. Because the first few days these companies trade, the underwriters, the banks that take them public support their share prices. So unless you're just desperate because you know the world is going to learn the magical mysteries that only you know about the wonders of this company, chasing an IPO is a very dangerous investment.
JUSTINE UNDERHILL: OK, so while you're a little bit wary about getting into an IPO soon as it happens, would you consider shorting an IPO given the fact that there is a lot of hype surrounding some of these B2C names?
MAX WOLFF: Yeah, so shorting it is tricky. You can't do the first 30 days, but there's often rotation. So there's a way people do it. So sometimes they play the rotation. So in other words, if you're interested in taking a somewhat jaundiced view of the opportunity set for the price offered by, say, Uber-- a contemporary issue for us-- then you might make an opinion about Lyft. Because presumably, some people who are interested in getting exposure to the ridesharing would have bought at the first opportunity, which was Lyft, chronologically ahead of Uber.
So you could play that game. You'd say, oh, OK, Lyft might do better than people think because they won't be as excited about Uber, or the reverse, depending on how you-- you have to wait 30 days usually to do it. And if you've been previous investor, you can't do it either. The first couple months of a company's trade, it's not a standard, normal trade. Looking at how they trade doesn't give you as much insight into how the public receives a company as you might want. But the sort of cheap, easy, organic way is to study the companies without succumbing to the temptation to make a major investment in the companies, especially these days.
So for a long time, there was a sort of reliable 20-plus% pop on IPO. And we still see that, but you have to be very fast-- and that's a market-timing game-- in and out, because often that fizzles pretty quickly. Lyft in the very recent past had a bit of this issue. So came out priced way above, about 20% above the IPO price on the very first trades to be done, and then it has sort of had a bit of a long retrace. Come down a bit over the subsequent several weeks here. And that's not so infrequent, by the way.
Because the other thing about the modern tech IPO, which people should keep in mind, is these are mostly what are called low float IPOs. So historically, you sell about 10% or 15% of yourself in an IPO. And these guys are normally selling more like 6% or 7% of themselves. So there's actually a very, very small number of stocks, while their big investment banks spend lots of millions of dollars doing a giant extended infomercial, and the media goes there, because it's exciting, and lots of pictures and interviews, and so you're really in a situation that could be a bit of a perfect storm for a savvy individual or small institutional investor, who's savvy in many ways, but maybe not so experienced in this market.
But again, what we're seeing is the price discovery models that we have that need to work for efficient markets-- if I have less liquidity, if I have less transparency, I get a discount-- have started to run in reverse. So a lot of these companies, people buy them because they're like, oh, now they'll be more valuable, because I can see inside and I can trade them. Only they aren't. Because something is a little bit broken here, disconnected between standard normal market function and the way we've seen tech IPOs come to the public in the last 10 years.
JUSTINE UNDERHILL: Do you have an outlook specifically for Lyft? You mentioned that it's kind of been on a bumpy ride for the past few weeks. Where do you see that potentially going?
MAX WOLFF: Yeah, so I think Lyft might continue to have some pressure. So the growth story is pretty good, a better growth story, by the way, than Uber, but a much smaller company. Historically, less losses, although lately they've had some pretty big losses reported over at Lyft. I think the issue with these companies is the following. These companies are stuck between a bunch of big entrenched players.
So if I'm Lyft, if I'm Uber, right now I'm an app that sits on a mobile phone, which means I collect no more data, possibly less, about my users than Apple and Google, who are fearsome competitors, who are looking at this to see what they want to do about it-- Google probably more than Apple, but both. And I'm also seeing the tech guys start with the movement towards self-driving cars, even though that's a few years off. And we're seeing a lot of labor issues, the questions being asked about whether the Uber and Lyft drivers are employees-- they're not classified that way now-- or whether they're independent contractors. That's a social issue, but pertains to them.
So basically, to get extremely excited about them at a valuation, you have to think, driverless cars are coming pretty soon. My guess is they're not coming as soon, because the regulatory issues, the insurance issues, and the state and local government issues are still pretty big. So they may begin to penetrate the market, but I don't think they're going to be as big a portion as fast. That's a headwind. They're going to have some labor issues.
And public markets prize profits. And these folks have delivered jaw-dropping losses, particularly Uber, but Lyft a bit, too. And I also think there's just a lot more transparency. And Uber has done a pretty good job of cleaning up a pretty problematic corporate culture that developed earlier. And I don't think that story's quite over. Big strides have been made, and lots of kudos to the management, but not a journey that's been completed. So there's risk there.
And I just think the space is a bit risky. Because if you do get the driverless cars, and then you have car manufacturers and technologists. And what Uber and Lyft become are apps that are good at training drivers. But if you replace those with machines, that's less of a special sauce. And then they become brands, convenience, and habit. And there is a bit of a question about how many billions of dollars that gets you.
JUSTINE UNDERHILL: So you see a lot more potential downside for these ridesharing companies than upside?
MAX WOLFF: At these prices, yes. I think they're both solid companies. I think they stay with us. I think they've built meaningful franchises. So I think they're both very interesting companies that have a long-term value proposition. But at the prices where they are presently situated, I think their return to sitting back and watching things evolve might be better than diving right in.
That being said, they still grow. They still matter. They're interesting companies. And the other thing I would always caution is, each IPO is different. Each company is a real company. So having a general outlook on IPOs is probably not a great idea. It's just, there's too much variation in the pool. Pay attention to what the market's telling you.
If you look at Zoom, which is basically a teleconferencing platform recently endorsed by the government, which is a nice bona fide. If you look at Zoom versus a Pinterest or a Lyft, the market's willing to pay a much bigger premium these days for profit as against growth than it used to. So it used to be growth, growth, and growth were the big three for tech IPOs. And now profit and/or declining loss profile is a big deal. And that makes the ridesharing space difficult, because it's massively and dramatically non-profitable up through now. And it tends to be a story of late for both the big players in the space, Lyft and Uber, where growth means increasing losses. And profitability being the lingua franca of the day, that means these might be smarter wait and watch stories than dive right in.
JUSTINE UNDERHILL: So you'd be more bullish on something like Zoom?
MAX WOLFF: Before it went crazy, so yeah. If there's something exciting or a positive attribute but it gets priced into the stratosphere, then you usually still want to wait and see. But you want to learn what the markets say. And the markets saying they're so excited about profit that they'll sort of chase you to the moon. And so then you don't want the next thing to be like, well, I think the market's going to be all cued up on growth.
If the market's telling you something else, you want to pay attention to it. That's a question of, momentum is a powerful winner. It's a good strategy. I am not a momentum investor, and I haven't historically focused on the laws and lessons of momentum. But there are plenty of folks who have, and they've done very well.
JUSTINE UNDERHILL: OK. Can you summarize your IPO outlook for the coming year?
MAX WOLFF: Yeah, don't chase. IPOs are the way we sort of take the market's temperature about how much extra risk they want. The answer has been more, more, more, more, more for a long time, so people forgot sometimes it's less, less, less. I think the trade spat coinciding with some of this IPO binge is another reason to be careful. And I think very rarely is it a once in a lifetime opportunity to buy an IPO in the first few weeks. And very commonly, it's an emotional decision caught up in the moment. And however understandable that is, just because something's understandable, doesn't always mean it's a great alpha strategy.
JUSTINE UNDERHILL: All right, Max, thank you so much.
MAX WOLFF: Thank you.
JUSTINE UNDERHILL: That was Max Wolff of Multivariate. For Real Vision, I'm Justine Underhill.