WASHINGTON. We didn’t even bother to put in an order for shares offered in the new Lyft IPO late last week. First of all, our discount brokerage didn’t get an allocation of shares. Second of all, since the issue was regarded as “hot” on the street, we knew we wouldn’t get any shares even if they’d been available for allocation. And third and best of all, those still holding Lyft IPO shares today are probably feeling like real April Fools.
Rich guys nearly always get all the best IPO shares. Because they’re rich and need more $$$.
So why does the average trader or investor almost never get shares in the really good IPOs? It’s because, in general, only the rich guys get allocated shares in hot issues – issues that are almost certain to “pop” nicely up from their IPO price. This initial “pop,” or jump in price from the initial IPO pricing, can be quite significant. New owners of these shares often “flip” those shares immediately when they open for trading or soon afterward, taking advantage of the “pop” to take a quick, fat and easy profit.
We’ve bitched about this problem before, but it will never change. It’s yet another reason why the rich get richer. Maybe in coming years, President AOC will fix this by reallocating the fat cats’ fat IPO flip profits to little guys like us. You think?
More about that Lyft IPO
But with regard to that Lyft (trading symbol: LYFT) IPO, we’d likely not have put in for any shares even if we could have got them. The reason why is something we’ve complained about for about as long as we’ve been bitching about hot IPO allocations that go almost exclusively to rich dudes. Like a number of fairly recent IPOs, the Lyft IPO’s publicly available shares lack one crucial element: one vote per share owned.
Oh, wait. LYFT shares do give you one vote per share. But the shares owned by the company’s CEO and a select few insiders – a vast majority of the shares now outstanding – are allocated TEN VOTES (count ‘em) per share. Which means that any LYFT shares owned by you and me (if we’d actually gotten any) aren’t worth jack when it comes to voting on corporate matters. The owners’ class of shares can outvote us by at least 10 to 1. Kind of like how the Democrats are trying to rig the next election by screwing up the electoral vote.
In other words, the corporate dads of Lyft, Inc., want investors’ money. But after having gotten it, they want the investors to just shut up and let these towering geniuses to do whatever they wish with the company. The hell with the rest of us. They’re smarter than us. Which in some ways, makes those still holding Lyft shares today 100 percent pure April Fools.
Remembering the Snap, Inc. IPO
Looking back for a similiar example, we recall the grossly overpriced IPO shares offered back in 2015 by an earlier cadre of towering genius-capitalists that ran (and still runs) Snap, Inc. (SNAP), parent company of Snapchat? Those shares were structured the same way: to never allow investors to really have a say over company management or direction. Another class structure situation.
That worked out well. (Not.) The stock popped very nicely going out the IPO gate. But the new shares gradually swooned into near oblivion because the company’s super genius founder wasn’t a super genius after all.
The Masters of the Universe are sometimes not so masterful
In eerily similar fashion, the Masters of the Universe running Lyft, Inc. watched their shares briefly soar when trading in the IPO opened last week. But then those shares almost instantly tanked. Lyft probably has a better business model than the ephemeral model offered by SNAP. But the corporate smart guys still lose gobs of money, which is why they want ours, just as long as we shut up.
As of the noon hour ET Monday, April Fool’s Day, ironically, LYFT shares still owned by Wall Street’s real April Fools continue to tank. Given that 20 percent drubbing, they’re already wallowing in their own bear market. That’s true even as the underwriters try to stabilize the stock’s price. This is legal in an IPO offering for 30 days after the opening trade, last time I checked.
In any event, this hot Lyft IPO mess immediately attracted the attention of the acid-tipped virtual pens wielded by the curmudgeonly Tylers over at ZeroHedge.
“Alas, just 24 hours after its constantly touted (on CNBC) IPO, things haven’t worked out quite as expected, and from its opening day highs of $88.60, LYFT – which was the largest IPO since Alibaba Holding’s BABA debut in 2014 -has taken the elevator back down to below its IPO price of $72 on only its second day of trading.”
The Empire Strikes Back
Oops. There’s a quick update to this piece on the sorrows of Lyfts cadre of stockholding April Fools. Plus a trading chart for Monday, April 1, 2019 thus far, graphically illustrating the horror, the horror.
“Update: the humiliation is now complete as the non-LYFT continues as the stock plunges more than 10% and is now down more than 20% from its Friday highs, officially entering a bear market.
“It was supposed to be the closely watched indicator that Silicon Valley’s decacorns [*] are fairly, and perhaps even underpriced.”
Intermission Feature: What the hell is a decacorn?
(*NOTE: Decacorns? That’s a new one on me. So I looked it up and had to laugh. Companies like LYFT – companies with at least a vague connection to tech – that emerge as vastly overpriced IPOs that have yet to either book or even imagine a profit, have for years been known as “unicorns.”
But these days, many unicorns emerge even more grossly overpriced than they used to be, necessitating a new bit of Wall Street trading jargon. That’s described in Business Insider, ironically in a piece that riffed on that earlier SNAP IPO I referenced, back in 2015:
“‘Unicorn’ is a now-popular term that’s used to describe tech startups worth $1 billion. They’re known for being magical and rare.
“Now, however, unicorns are abundant in Silicon Valley. There are so many companies with sky-high valuations of $10 billion or more that the industry has come up with a whole new name to describe them. Bloomberg Business has christened these companies ‘decacorns.’”
Back to the
Amityville Lyft IPO Horror
We return you to our regularly scheduled program, now in progress.
The Tylers next capture a sampling of the reaction to the Lyft tank-a-thon in the Twitterverse.
LYFT underwiters trying to get it back to $72….. pic.twitter.com/FfWCcDR0wh
— NOD (@NOD008) April 1, 2019
Anyone file a class action lawsuit over the Lyft IPO yet?
— Hipster (@Hipster_Trader) April 1, 2019
Their final comment:
“While this is clearly ‘not good news’ for Uber which is waiting in the wings for its own moment of $120 billion public offering zen, so far the broader equity market doesn’t seem too worried that LYFT appears to have top-ticked the market’s cycle highs.”
So who owns those rapidly declining Lyft shares now? C’mon, you already know…
Of course, somebody now has to own these collapsing shares. It’s a good bet that those April Fools left holding the bag are, predictably, mostly little guys like you and me. Frozen out of the initial IPO, they eagerly buy the shares the rich dudes are casually flipping for a fat profit at above IPO prices. Which means the bagholders get to own shares that quickly reach bottom (or lower) with a sickening thud before breaking through the new floor and going even lower, past one or two sub-basements. When it comes to figuring out how Mr. Market works, the overeager investor never learns.
The same ritual happened with the IPO shares of SNAP. Which company, interestingly, also sold their effectively non-voting voting shares to the public. The only difference: SNAP shares tanked much more slowly after the initial pop. Back then, I surprised myself by asking for – and actually getting a tiny allocation of these shares and bought them for an experiment. (I do things like this occasionally, just to see how things work out so I can write about them later.) I actually got out of these shares a month later for a miniscule profit as SNAP shares continued to sink toward a much lower bottom.
Lucky me. SNAP shares ultimately collapsed to less than half of what I sold them for.
IPO lessons learned
There are two lessons here. While juicy IPOs can win you fun and profits, don’t ever count on getting any shares in the hottest ones. Because, unless you’re a rich dude (or dudette), you’re not getting any. Contrariwise, if you can get all the shares you want of a given IPO, put on your Nikes and run the hell out of there. This is an almost sure sign that the given IPO is likely a real dog that will lose you money right out the gate.
Second of all, if you don’t get an allocation but desperately want the shares of an IPO after they’re available on the open market anyway, the general rule is DON’T DO IT. That’s because if you do, you’ll likely rush in while the stock is still popping, and you’ll end up burned to a crisp when the shares settle back down to earth. That final bottoming often occurs well below that overpriced IPO price, the price set by greedy underwriters who overpromised their client. If you must buy such shares, first stop. Then wait awhile and buy the shares later after they’ve settled down somewhere on parking garage Level F.
True, sometimes IPO shares quickly reverse and soar even higher than the initial pop. But don’t count on it. In fact, never count on anything if it involves stocks, bonds and options, the topics we mainly discuss in this column.
And one final lesson
Actually, there’s a third lesson for IPO buying as well. Don’t believe the bloody hype the marketeers put out during the normal and customary “IPO Road Show.” If a new company (like LYFT and SNAP) doesn’t make any money and doesn’t show any promise of profitability in the near future, curb your enthusiasm. When I used to be in the business, I’d always tell my customers, “If the people hyping IPO X and IPO Y were so smart, why are they out doing this? They should be relaxing at their beachfront mansions in the Caymans.”
If something looks too good to be true, it probably is.
And if a new IPO isn’t selling you shares with equal voting rights and minus special voting rights for the ownership class, the hell with them. No one is a genius forever. And a lot of the folks both inside and outside the current Lyft IPO fiasco are probably feeling today like they, themselves are the real April Fools.
— Headline image: Too bad they couldn’t get a lift from Lyft. A man and woman hitchhiking near Vicksburg, Mississippi in 1936,
photograph by Walker Evans. (Farm Security Administration Photographers,
US government photo in the public domain)