Lyft's $4.2b day two Wall Street tumble a cautionary tale for unicorns

Lyft came back to Earth on its second day of trading.

The ride-hailing company's stock shot up by nearly 25 per cent after it hit the open market on Friday. It then settled at $US78.29, or 9 per cent above its $US72 initial public offering price.

After a glittering debut, Lyft shares tumbled below its IPO price on Monday. Credit: AP

Monday was a different story. Lyft shares crashed in early trading - offering a sobering lesson on the risks of jumping in on the opening trading day of a hot company, and closed 11.9 per cent down at $US69.01, wiping around $US3 billion ($4.2 billion) off its market cap.

"It's a good example of why people should approach IPO investing cautiously," said Kathleen Smith, a principal at Renaissance Capital, which manages IPO-focused exchange-traded funds. "This company has large losses and will not be profitable in the near future."

Lyft is the first in a wave of highly anticipated, so-called unicorn companies that are expected to hit the public markets this year. Uber, Pinterest, Slack, Airbnb and Palantir Technologies are among the big names being teed up to go public.

Both Lyft and Uber, two high-profile disrupter companies, have yet to make a profit. Lyft said in regulatory filings last week that it posted a $US900 million loss last year. Money managers say it's too early to know whether the ride-sharing companies will become great businesses - or not.

"Right now, there is a lot of exuberance and excitement,"said Nicole Tanenbaum, chief investment strategist at Chequers Financial Management. "But at the end of the day, you're betting on the long-term profitability of these companies. The path to that profitability is still unclear. A lot of assumptions are being made. Sometimes it works out to be a good business like Facebook. Not always."

Facebook has been a massive roller-coaster ride for investors.

The social-media giant went public in 2012, opening at $US38 a share. A year later, Facebook was trading at $US25.76, a loss of 32 per cent compared with the IPO price. It has paid off for those who held on; Facebook was trading at $US168 on Monday.

Snap, on the other hand, hit the open market two years ago at $US17 a share. The stock surged 44 per cent the first day. A year later, the shares were up 6 per cent . Snap was selling for $US11 on Monday.

Other unicorns such as Uber are planning to list on the stock exchange. Credit: AP

"Amazon didn't make money for years," Washington investor Michael Farr said. "In time a fair price will emerge on these unicorns and real investors will show themselves. In the meantime, you are seeing investors who are interested in a quick pop and not a long-term investment." Amazon's founder and chief executive, Jeff Bezos, owns The Washington Post.

S&P Global Market Intelligence examined companies that went public at a value above $US500 million since 2009. About 65 per cent showed a positive change in the stock price after six months from the IPO. At the end of a year, 62 per cent showed a positive change in the equity price.

Some of the Monday boomerang can be attributed to timing. Last Friday was the end of the first quarter. Some pre-IPO investors may have delayed selling the stock until Monday because of disclosure reasons, according to observers.

"To avoid the underwriters' scrutiny, big investors who were allocated stock in the offering may have waited until April 1 to sell so that their quarter-end reports didn't reveal their flightiness," said Daniel P. Wiener, chief executive officer of money manager Adviser Investments.

"It was a short ride for Lyft's shares."

Smith said the fact that Lyft reversed itself and plunged below its IPO price is a cautionary tale.

"This is a technical black eye," Smith said. "Investors will not forget. The good news is that the companies coming out following Lyft, such as Uber and Pinterest, should be priced more reasonably."

The Washington Post