In this final installment of my mini-series about venture capital, initial public offerings, and Uber, I want to start by reminding you of your prime directive as an investor: buy low, sell high.
These are the four most important words in investing. They are your key to unlocking the stock market’s fortunes.
And the thing about “buy low, sell high” is that it really doesn’t have much to do with where a company has been. Check a chart of just about any company’s share price, and you’ll probably see that the share price was lower six months ago, a year ago…
But that doesn’t mean the share price won’t be higher in the future. In fact, the best companies will almost certainly see their stock prices rise in the future. New products, rising efficiency, cost savings, more customers, price hikes… these are what you want to see from the companies you invest in.
Unfortunately, I don’t think this is true about Uber and Lyft…
IPO Numbers
I watched the Lyft buy orders filling as soon as the stock opened on Friday, starting a little over $87.
Let me tell you straight out: Buying Lyft at $87 a share is not “buying low.” Because at $87 a share, Lyft is worth about $30 billion.
Let’s say you were in the market to buy a company. You find Lyft, which took in $2.2 billion in revenue last year and posted a net loss of $911 million. Would you really pay $30 billion for that kind of performance?
When Warren Buffett buys a company, he wants the operating cash flow of that company to completely pay him back for his investment in less than 10 years. Lyft has negative cash flow of around $280 million. Even worse, Lyft burned $472 million in cash last year.
Oh, and did you know that both Lyft and Uber are undercharging for rides to get market share? And they also recently cut wages for their drivers?
So the question is: How long will it take for Lyft to generate $30 billion in operating cash flow?
The company will have to stop losing money first. And it needs to grow revenue by about 500% to make this even a reasonable question…
Seems pretty clear to me. Lyft is not a case of “buy low.” Lyft is a case where all its early investors (venture capital, investment banks, etc.) are trying to sell high. Which is likely why the stock opened at $87 and closed at $78…
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CNBC: Lyft Surges!
Just this morning, as I was finishing up this article, I saw the CNBC headline: “Stock Surges in Debut.”
Amazing. They are actually saying that opening at $87 and closing at $78 is “soaring.” Seriously?
Actually, yes. They are serious. But they’re not talking about the shares you might’ve bought. For you, or me, for that matter, the shares definitely didn’t soar. Kind of the opposite. But for the investment banks that ran the IPO and had a wholesale price of $72, yeah, they soared. At the retail investor’s expense…
Sadly, this is where the financial media is these days. There is more institutional money (VC, endowment funds, sovereign wealth funds, hedge funds, etc.), and there is less retail investor money, due to the post-crisis drop in individual investing.
And CNBC knows who pays its bills, and it’s not you and me. They should be ashamed…
I will tell you that it’s actually a good thing that CNBC has so blatantly sided with the big money against you and me. Because if there was any illusion that CNBC has your interests at heart, well, that should be pretty thoroughly shattered by now.
Editor’s note: Thank goodness there are still independent research firms like Angel Publishing and Wealth Daily. I know some people don’t like the subscription newsletter biz, but I will tell you that it’s the most honest and democratic investment business model out there. A year of my Wealth Advisory is $99, and if I don’t do a good job (i.e., pick winning investments), you cancel and get a refund.
Is CNBC gonna refund any Lyft losses? Yeah, didn’t think so…
The sad fact is, venture capital isn’t so much about nurturing young companies anymore. It’s simply about creating a narrative that will help the early investors make money.
Now, that doesn’t mean there won’t be opportunities with IPOs. My Wealth Advisory readers have had great success with Twilio (NYSE: TWLO), which we bought shortly after it went public. The one caveat is that we all have to be more discerning about the companies that come to market.
Beware the big “story” IPOs like Lyft and Uber. It’s gonna be those under-the-radar stocks that have the real potential. If you’re interested, pay attention to the work my colleague Monica Savaglia is doing with her IPO letter. It’s good stuff.
Until next time,
Briton Ryle
@BritonRyle on Twitter
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
