Dissecting what Lyfts IPO means for Uber and the future of mobility

Extra Crunch offers members the opportunity to tune into conference calls led and moderated by the TechCrunch writers you read every day. This week, TechCrunch’s Kirsten Korosec and Kate Clark led a deep-dive discussion into Lyft’s IPO and the outlook for the business going forward.

After skyrocketing nearly 10% on its first day hitting the public markets, Lyft stock has faded back down towards its IPO price as some investors grow more concerned over the company’s path to profitability (or lack thereof) and the long-term fundamentals of the business. But Lyft’s public listing is bigger than just the latest in increasingly common unicorn IPOs. As the first public “transportation-as-a-service” company, Lyft offers the first inside glimpse into the business model and its economics, and its development may ultimately act as the canary in the coal mine for the future of transportation.

“Lyft, hasn’t just survived, they’ve grown. 18.6 million people took at least one ride in the last quarter of 2018. That’s up from 16.6 million in late-2016. That illustrates the growth that the company has had. They’ve also said that they have 39% share of the ride-sharing market in the US. That’s up from 22% in 2016.

To me, the big question is let’s say they had Uber’s share, which is 66%, would they be able to make a profit? Is that the determination? And I’m not convinced that it is, which is why all these other aspects of the transportation-as-a-service business model [micromobility, AVs, etc.] are going to be really important.”

Image via Getty Images / Mario Tama

Kirsten and Kate dive deeper into what the market response to Lyft means for Uber and the timeline for its impending IPO. The two also elaborate on their skepticism of ride-hailing economics and debate which innovative transportation model will ultimately drive the path to profitability for Lyft, Uber and others.

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Danny Crichton: Good afternoon and good morning everyone this is Danny Crichton, executive editor of Extra Crunch. Thanks so much for joining us today with TechCrunch reporters Kate and Kirsten.

I’ll start with a quick introduction for our two writers today. We have Kate Clark, our venture capital reporter. Kate has been with us for a while now covering everything in the startup and venture world. She’s also one of the hosts of TechCrunch’s podcast Equity and also writes our Startups Weekly newsletter.

Our other writer today is Kirsten, our intrepid automotive writer covering all things Elon Musk, Tesla, and everything else in the autonomous vehicle space. Kirsten has also been with us for quite some time and also writes a newsletter that she just introduced in the last couple of weeks, around transportation. So with that, I’m going to hand off the conversation to the two of them now.

Kirsten Korosec: Thanks so much Danny. This is Kirsten Korosec here. The newsletter is in a bit of a soft launch but it is being published Fridays and we hope to have an email subscription coming sometime in the future, so just keep an eye out for that.

I should also mention I too have a podcast centered around autonomous vehicles and future transportation called The Autonocast that comes out weekly. Thanks so much for joining the call and just a reminder, we want participation. So at about the halfway point, we’ll turn and open up the line and answer questions. Let’s get started.

Before we dig into all the hot takes out there, I think it’s worth providing a primer of sorts — a general timeline of events. We all probably know Lyft of course and most of us think of 2012 as the launch date when it came to San Francisco, but really Lyft was build out of the service of Zimride. Which is the ride-sharing company that John Zimmer and Logan Green founded in 2007.

A lot of attention has been placed on Lyft in 2018 with what happened in the past year, in the run-up to the IPO. But I think it is worth noting the intense activity and growth that happened between 2014 and 2016. These are critically important years for Lyft, just a frenzy of activity in a period where the company gained ground, investors, and partners.

To showcase the amount of activity that was happening; Lyft had two separate funding rounds, one for $530 million another for $150 million, just two months apart in 2015. You might also recall in early-2016 its partnership with GM and the automakers’ $500 million dollar investment as part of the Series F $1 billion dollar fundraising effort.

That was really interesting because GM’s president at the time Dan Ammann took a seat on the board, which he has since vacated. As Lyft and GM started realizing that they were competitors. Now, Dan is the CEO of GM Cruise which is the self-driving unit of GM.

2017 and 2018 were also big years, as Lyft launched their first international market in Toronto. They made big moves on the autonomous vehicle front, which we’ll talk about today, and in micromobility. Their scooter business launched in Denver in 2018. They bought Motivate, which is the oldest and largest electric bike share company in North America. Then, we finally get to the end of 2018, and this is when Lyft confidentially files a statement with the FDC and we’re off with the races to the IPO.

The last two months or three months is when Lyft unveiled its prospectus, met with investors, priced its IPO and made its public debut. So Kate what are the nuts and bolts of the IPO and what’s happening right now?

Kate Clark: Hi everybody this is Kate. So I’m just going to mention really quickly the timeline these last couple of months in the run-up to Lyft’s highly historical IPO. So going back to December, that’s when Lyft initially filed confidentially to go public. We later find out that they are going public on the NASDAQ when they eventually unveiled their S1 in early March.

This is after Lyft had raised $5 billion in debt and equity funding at a $15 billion dollar valuation, so there are a lot of people paying attention to what was the first ever rideshare IPO. So then in early-March, we’re able to get a closer look at Lyft’s S1, which tells us that the company has $911 million in losses in 2018 and revenues of $2.2 billion. So after calculating and pulling together some data, a lot of people were quick to find out that that means Lyft has some of the largest losses ever for any IPO. But also has some of the largest revenues ever for any pre-IPO company, just following Google and Facebook in that category.

So this is a really interesting IPO for a lot of people given these sky-high losses but also these huge, huge revenues. The next we see Lyft price their IPO between $62 and $68 dollars a share. Some people were quick to say that that was maybe a little underpriced, given that this was a highly anticipated IPO with a ton of demand. So on the second day of Lyft’s roadshow, the process, they say that their IPO is oversubscribed. So demand is apparently huge, their oversubscribed, so they decide we’re going to increase the price of our shares.

Image via GettyImages / maybefalse

So Lyft then says they gonna charge a max of $72 per share and then on the day of their IPO they charge $72 per share, the next day opening at $87 per share. So we see a huge IPO pop that I don’t think was particularly surprising given that they already spoke of this demand, and we had already known that there was a lot of demand on Wall Street. Not just for Lyft but just for unicorn IPO’s of this stature, given that there are so few of these. So Lyft began trading hitting $87 per share though, if you’ve been following the news that’s not were Lyft is today.

Kirsten: Yeah so I was just about to ask — Kate give me the latest numbers, you know a lot of focus is on that opening day but things haven’t exactly sustained. So what’s happened in the past few days?

Kate: Yeah it’s really tough to manage expectations after an IPO. I mean, I think there has been a lot of criticism towards Lyft now and I think it’s trading below its initial share price. So as I mentioned Lyft opened at $87 per share, it priced at $72, but almost immediately they began trading below that $72 price per share. So they closed Tuesday trading at $68.96 per share. Still boasting a market cap larger than $19 billion. So they’re still significantly valued at more than they were as a private company at $15 billion but it doesn’t look good to be trading below a price per share so quickly.

However, it actually did hit its IPO price for just a minute today, so maybe let’s give it a few more hours and see where it closes. It’s possible that it will sort of jump towards that $72, but it’s still trading quite significantly below that $87.

Kirsten: With IPOs like this, and especially such a high profile one, there’s going to be a ton of attention on share price and on volatility. And so I’m wondering, in your view, what did this first week, or first few days of volatility say to you? What does it say about Lyft’s future and, well certainly, its present?

Kate: Yeah. I mean, it’s hard to say. I think a lot of people were questioning if Wall Street was going to be interested in a company like Lyft that’s extremely unprofitable at this time and has years left before it will reach profitability, if indeed it ever reaches profitability.

So at this point you got to wonder, do some of these investors that did buy Lyft right off the bat, were they really long on Lyft? Because it does look like a lot of those investors have already sold their stock and perhaps weren’t as invested in Lyft’s long-term profitability plan, which involves a lot of very iffy things, like the future of autonomous vehicles, which we’ll talk about later in this call. And there’s a lot of uncertainty there.

But with that said, it’s not uncommon for a stock to experience volatility right off the bat, and you can’t assume the future of that stock price just because of some early volatility.

And we gathered some examples of IPOs where there was some early volatility that did not determine the long term future. So Carvana, for example, which is an online used car dealer in the automotive space, and it did experience volatility at first, with the stock sliding in the first few months but ultimately trended upward.

Kate: So Carvana opened at $13.50 a share, falling below its IPO price, so it didn’t even have the IPO pop. And then in 2018, it hit an all-time high of $65 per share. Today, it’s trading around $58 per share, so that’s ultimately a positive story to be told there.

And then another example on the other side of things is Snap, which actually took four months to dip beneath its 2017 IPO price, and we all know Snap has definitely not been a success story and it’s trading well below its offer price. But then finally, Facebook, for example, dropped below its IPO price on its second day of trading and then actually had a rough first year on the stock market before the stock ultimately took off and became a very obvious success.

Kirsten: So, Kate, I’m wondering why you think that there was that initial run up on that first day. Was it excitement? Was there something material that was pushing the price up? What was the cause?

Kate: I think there was a lot of excitement and demand around this IPO because it was very much one-of-a-kind, and there were a lot of investors that it seemed were really long on the possibility of Lyft becoming this hugely profitable company. And I think a lot of that was because in the S1, although you did see these really, really big losses — quite major, just ridiculously huge losses — you did see that they were shrinking over time and that there was definitely a path in which Lyft could take where it would reach profitability, say, in the next five years.

And I think Wall Street was really paying attention to that, and they were not paying attention to some of the other metrics. Now, they’ve taken off their rose-colored glasses and they’re looking at Lyft as a public company, and it’s just a little bit different now that it’s actually completed its debut.

Kirsten: Well, so, I mean, I like to view IPOs often times, and especially in Lyft’s case, as a measure of an investors’ faith in the company’s growth prospects, because this is a company that while it does have quite a bit of revenue, it has significant losses and it’s really planning not just for the present day but for the future. It’s been called a disruptive business for a reason, and it is certainly very forward-looking. So I’m wondering if you think it was a good strategy for Lyft. They wanted to open it up to “the everyman” when they actually went to market. They did a different approach, and do you think this might have had an effect? I mean, it’s very on-brand for them to do this, but I’m wondering if you thought that means that some of the investors aren’t as disciplined.

Kate: Do you mean with the fact they were providing bonuses to their employees and drivers to actually participate in the IPO as well?

Kirsten: Absolutely. That’s actually a really good point that maybe you can elaborate on. Lyft did a little bit of a more open approach for its IPO. Typically IPOs can be closed off to only large, institutional investors. So did this set them up perhaps to have more volatility?

Kate: Yeah, Lyft provided some of their drivers up to, I think, $10,000 to, in theory, actually buy stock in the IPO. Do I think that had a high impact? I don’t know. I think there’s not enough comparison, not enough data to really make a decision or to make a hot take on whether that really was part of the volatility. I think just given the uncertain nature of Lyft’s future and their big losses, I think their volatility was pretty inevitable, and I think people paying attention to this are probably not particularly surprised by how the stock has fared in these first couple days.

And I do want to add there’s this six-month lock-up period for the venture capital funds that own Lyft and as well as their employees, so I think we’re not sure what’s going to happen when that lock-up period ends and those holders can just sell their stock right then or how that will impact the stock price, as well.

Image via TechCrunch/MRD

Kirsten: So something to keep an eye on. It reminds me a lot of a company I write a lot about, which is Tesla, and I’ve been covering them for years. And it’s one of the most volatile stocks, and their investors, they certainly have large, institutional investors, but the number of fanboys that they have with smaller investors, either prop up the share price sometimes or add to that volatility, and I’m kind of really curious to see if that happens with Lyft. If you go to a shareholder meeting at Tesla, for example, it’s filled with people who are passionate about the brand and its CEO, Elon Musk.

And Lyft and possibly Uber, if they end up finally going through with their IPO, you can see that potentially happening because people feel very strongly about the brand and also the service it provides. So I’m curious to see how this all sort of shakes out. And I tend to take the view that I invest personally in mutual funds and things like that. I don’t invest in any of these companies, but the long, patient view tends to be the better one, and trying to catch a falling knife, as investors have told me, is never really a good idea.

So I’m curious to see if investors sort of grow up and learn with Lyft, if they’ll become disciplined and just sort of wait it out and see them play out the growth prospects for the company in the long term. So, we’ve been talking about Lyft and I can’t not talk about Uber as a result. I’m wondering what you think this might mean for Uber. The big story initially was let’s beat Uber to IPO and I’m wondering what this means then. Is this indicative of what Uber is going to experience?

Kate: I think that question is really at the top of everyone’s mind right now, including my own. I will say that I still do think it was highly beneficial for Lyft to get out first. Because imagine if and when Uber does too experience volatility, which it probably will, if it were to have gone first, I think that would have frightened Lyft a lot more than Lyft’s volatility may or may not be frightening Uber. So, with that said, I think I’m of two minds right now with my thoughts on how this impacts Uber’s IPO. I think that if Lyft stock continues to be volatile and perhaps even falls lower than it already has. I do think that there is a chance Uber may ultimately decide to push its IPO back.

I think that for a few reasons, namely being that Uber is not in a huge rush to go public. They do have the ability to wait. They have filed to go public. So it’s likely to happen quite soon, but it may not happen in April as they are reportedly planning to do.

On the other hand, Lyft went public at like a $24 or $25 billion dollar market cap. Whereas Uber is going to debut at maybe a $120 billion dollar initial market cap. So these IPOs, although they are both ride hail IPOs and they are very similar companies in a lot of ways, they’re also very different and Uber is operating on an entirely different scale though it still is unprofitable. And has some of the same issues that, investors are probably noting about Lyft.

I think it’s either going to be that it’s maybe that they do decide to push it back or maybe that Uber is like, well we’re five times larger, six times larger. We have much larger statistics to show to investors. There’s just a chance it could go either way. I wish I had a better, more concrete answer, but I just don’t think we know yet.

Kirsten: Well I’m okay with not taking hot takes just a few days into this IPO. I think this is a good time to open it up to questions. While we wait for a question, I will do one quick follow up with you Kate. What do you think this means for Uber? Will it delay its IPO?

Kate: Right now, no, I don’t think they’re going to. But it’s like I said, it’s tough to say given that it’s only been a few days of Lyfts IPO. But no, I think you’ve got to imagine that they are ready to discuss the possibilities of Lyfts IPO and already planned ahead if there was volatility. They maybe already assumed that would happen, given that that’s not uncommon. So right now I’m going to say no, I don’t think they’re going to delay, but it’s certainly still a possibility.

Kirsten: Okay, great. I think another really interesting piece for Uber was their acquisition of Careem. This is a deal that was made right before their IPO, so it was shifting attention away from Lyft, just for a moment.

Why did Uber do this? Is this not a signal that they’re delaying their IPO? Is this just prepping for it? What are you hearing on it? I’m wondering if this might have just been a strategy to show the world investors, specifically potential shareholders, what the road ahead is going to look like. Or is it some other reason — Is it to justify their really big losses?

Image via Careem / Facebook

Kate: I think it’s the latter two things you said.  Just to give some background Uber is paying about $3.1 billion to acquire Careem, which is a Middle Eastern ride-hailing company. So basically just the Uber of the Middle East. Uber does have a history of acquiring, smaller competitors like this in different markets where it’s not active, just as a way for Uber to quickly grow essentially.

So I do think it’s a big deal to make just before going public. So I guess we don’t know if they necessarily will go public in April, but I think it was a move to present to public market investors as a prep for an IPO, to show “we just acquired this company, here’s more evidence of future growth”. Like you mentioned, it’s definitely a justification of those huge losses that we know Uber has.

Kirsten: Thanks for that. Questions?

Caller Question: Hi there, so when we talk about looking ahead and moving towards profitability — what role, if any, do you think the acquisition of a scooter or other mobility companies will have for companies like Lyft and Uber?

Kirsten: That’s a great question. I think it’s going to be a huge piece of both of their businesses. A lot of people describe this as the first ride-hailing IPO. We need to stop calling this a ride-hailing company. These are transportation-as-a-service companies and they’re making money. But generating revenue as opposed to making profit is a totally different thing. When you start talking about ridesharing, it’s a tough business. With those it’s an asset-light business, right? They don’t own the cars and then they technically don’t employ these drivers.

But at the same time, as of 2016 only something like 1% of people in the US were using rideshare. So you see this opportunity, but they’re not pushing forward. There is a ton of car ownership still that’s happening. Yes, sharing has absolutely increased, but 17 million new cars were sold in the US last year. So scooters, bike share and other businesses are going to be key to their paths to profitability because ride-sharing alone is just difficult to make a profit. It’s not difficult to generate revenue. It’s difficult to make a profit on.

And I’m wondering, talking about that road to profitability, I do think it’s worth noting how much they have grown. Lyft, hasn’t just survived, they’ve grown. 18.6 million people took at least one ride in the last quarter of 2018. That’s up from 16.6 million in late 2016, that illustrates the growth that the company has had.

They’ve also said that they have 39% share of the ride-sharing market in the US. That’s up from 22% in 2016. To me, the big question is let’s say they had Uber’s share, which is 66%, would they be able to make a profit? Is that the determination? And I’m not convinced that it is, which is why all these other aspects of the transportation-as-a-service business model are going to be really important.

Kate: I think what you pointed out is important, about Lyft and Uber both becoming transportation businesses, not ride-hailing companies and I think their long-term visions involve scooters, bikes, autonomous vehicles, all sorts of different models of transportation beyond just car sharing.

Kirsten: I hate to be wishy-washy here and say, I don’t know, but I do really think that it’s going to come down to a variety of items all coming together. It’s just not going to be enough for Lyft to scale up its ride-hailing business. And I should point out that Uber should be treated in some ways the same way, but there are some distinct differences. But it’s important for us to think of Lyft as a transportation-as-a-service business. I mean they say in their prospectus that transportation is a massive market opportunity. The hard part of course is turning that into a profit. There might be opportunity there.

So there’s this asset-light business that they have right now, which is the ride-hailing, but then they are making acquisitions in the micromobility space and that is going to become more capital intensive. And that’s going to force them to change their business. And then there’s the autonomous vehicle piece. And then finally, I actually think that one of the pieces of their S1 that has really not received much attention at all is what they’re pursuing in terms of public transportation. And they have said that they, and Uber, intend on being a piece of the public transit ecosystem.

Now that doesn’t mean that they’re going to necessarily be operating buses, but there are people that I’ve talked to in the industry who actually feel like, in Uber’s case, they want to control every mode of transportation. For Lyft, I see them seeing more of the opportunity financially with the data piece and becoming more of a platform and becoming that one-stop shop where you use an app to figure out if you want to use the scooter or a bike, or ride-hailing or buy that ticket for the L in Chicago or the Bart System.

So I really think that the public transit piece often gets ignored and cities are having so much more control now and weighing in. We see this in New York City with congestion pricing. It’s going to force Lyft and Uber to take advantage of these opportunities and use their platform in a way that perhaps accelerates faster than they had intended.

Kate: I’m very interested in the public transportation element, but I’m also very skeptical of the scooters and bikes in the future for Lyft, I think, given the unit economics, I certainly wouldn’t rely on them to be Lyft’s path to profitability. I think autonomous vehicles are a much more interesting path towards profitability. So a lot of companies, Uber, Lyft, Waymo and more are focusing on autonomous vehicles and their development, whether that be with hardware or software. How does Lyft’s strategy with autonomous vehicles differentiate from some of their competitors or does it does differentiate?

Kirsten: It does differentiate, and the funny thing is, is that so you don’t see micromobility necessarily as the oath to profitability and are interested in AVs and I write about AVs, but I see that AVs as a harder path to profitability in a way because of the nuts and bolts that it takes to develop them.

So just to weigh in really quickly on the micromobility piece and then I’ll move on to AVs; To show the opportunity but also the volatility in a real-world example for micromobility, I was in Austin for South by Southwest, I think you were there too, and you probably saw scooters everywhere, right? 18 months ago there were no scooters or bike share in the city. Then bike share came first.

Image via Flickr / Austin Transportation /

And I was talking to that mayor of Austin and one of the folks from Spin, which is a Ford owned business, and they told me something that was really remarkable that I hadn’t thought about, which was that scooters were disrupting the bike share business. So bikes share came in and then scooters came in and all of a sudden they’re pulling bikes off the streets because no one was using them or were not using them at the same level as scooters.

Lyft is going to go through these same exact growing pains and people are figuring out what works. And as you mentioned, the unit economics are an issue, the wear and tear on the scooters alone is driving up costs and driving down revenues certainly, but pretty much making it very difficult to make a profit on it.

But that’s a near term business, right? So it’s at least generating revenue right now. On the other hand, you have this other piece, which is the AV piece. Lyft is doing some really interesting things on the AV piece — they kind of have a two-prong approach.

So they basically created a ton of partnerships to use their platform. So this started a couple of years ago and companies like Aptiv,, even Waymo and nuTtonomy, which Aptiv just recently bought about a year ago and GM, and Lyft basically allows developers to use their platform and connect to their autonomous vehicle and offer these rides.

And the best example of this, if you’ve been to CES or if you have been to Las Vegas I should say more specifically, is this partnership that Lyft has with Aptiv — and Aptiv as a tier one supplier, they used to be called Delphi, they spun out, they bought nuTonomy, and they’re Aptiv now. And this is taking Aptiv automated BMW, which are on the Lyft network. If you hail a ride, you might be asked if you want a self-driving car, or “are you okay with a self-driving car?” And they have a safety driver, no humans have been pulled away from it yet. But they provided about 35,000 rides since I want to say January 2018.

Then they’re also doing Level 5, a dedicated self-driving vehicle division that launched in 2017. And here they’re basically creating an open self-driving system or open SDS. On top of that, they have partnered with Magna, an auto parts producer, to develop these self-driving systems that can be manufactured at scale.

And so you just see a rush of partnerships and sort of dual approaches and all of that costs a lot of money. And I can’t emphasize the amount of money that it costs or will cost to develop these systems and deploy them commercially. And I hear from other companies figures like $5 billion to get self-driving vehicles. So developing the full stack, doing fleet management, maintenance, all of that — that’s a lot of money. And, I’m not sure where Lyft, will get that capital, will they get it from the open market or will they have to go and ask for more capital.

Kate: So when do you think then that Lyft will be able to commercialize autonomous vehicles?

Kirsten: The timeline? So depending on who you talk to, you can hear from any of these developers between five years and 30 years. I think it’s important to talk about language and how we talk about autonomous vehicles. So to be clear, there is currently not a single commercial autonomous vehicle deployment where a human being or safety driver has been pulled away from the wheel. It just doesn’t exist.

There are plenty of pilots and Waymo is probably considered the leader in that list, though it is a bit of a confusing one for me because they have so many partnerships and they’ve become competitors to some of those partnerships. The analogy I use is “Survivor,” the reality show. Everyone wants to make these alliances so they don’t get voted off the island.

And now we’re at that point where autonomous vehicle development has entered what we call the trough of disillusionment, which is heads down, “let’s get away from the hype, let’s do the hard work.” And I think we’re going to see a lot of those partnerships and headwinds really come up in the next year, 18 months. So to put a target date on Lyft, it’s really going to depend on which one of those partnerships really play out and are real. I think the one with Aptiv seems the most real to me based on what I know the company is doing and I can see them doing a lot more pilots in the next 18 months.

Does that mean commercial deployment without a human safety driver behind the wheel? I’m not sure I can see a lot more these pilots with a human safety driver expanding beyond Las Vegas. I see pilots happening absolutely in the next year to 18 months. The issue is going to be when is that human safety driver going to be pulled out and with which partner.

Kate: So should we open it up to questions again?

Caller Question: Hi, I was just wondering how we should think about the regulatory risks that might exist as these companies expand to new cities, new markets, or even the public transport use case you mentioned. Thanks.

Kirsten: The regulatory piece is an interesting one. Let’s talk about ride-hailing first. We’ve already seen the regulatory environment, in cities, push back against companies like Uber and Lyft. I think the congestion pricing model that just launched in New York City is going to be one to watch and could be something that will put pressure on, on businesses like Lyft.

Kate: I agree and just to speak, quickly on the scooters; I think the narrative around scooters has been pretty dominated by how cities have forced them out or cities push these strict regulatory barriers on them. And I think that’s still playing out very much. There are even some scooter providers that have had to pull out of cities that they worked very hard to get into in the first place. So I think that has slowed down some of the growth there. And given that Lyft has micromobility as such a key part of their road to profitability, I think that’s partially why I am a little bit skeptical of how that’s gonna play out.

Kirsten: One thing we’ve found, and something to consider for Uber as well, in the future, if any of these AV developers end up, filing for IPOs on their own — there’s been chit chat about Waymo someday doing that or GM cruise someday— the implications for all of these companies and their relationship with cities should not be ignored or undervalued.

And I think you see a bit of that playing out with the present day track we have, which is the ride-hailing scooters and bike share cities and transit agencies or the DOT of different counties finding that they are in a more powerful position than they’ve ever been before. And they are exerting that power.

And so you will see instances like Los Angeles where they have put forth a mandatory data sharing component if you want to operate in their city. This raises some privacy concerns by the way, but it also adds another cost to a company or certainly forces them to look at their business a little bit differently.

Then you start talking about AVs and where are they will operate, how they will operate, where are they will park, what type of vehicle will be allowed in the urban center. In places like Europe, there are strict emissions rules, so that’s going to go to an AV or hybrid profile. And it’s important to think about what that regulatory framework might be and acknowledge the fact that it’s really a mishmash.

There are voluntary guidelines on the federal level right now, but there were no mandates. And so it’s really left up to the cities, counties and states to decide how an AV might be deployed. It’s going to mean probably more lobbyists in DC working with federal folks to ensure that their business doesn’t get hamstrung as a result as well as more of a presence in those cities and states and counties.

But Kate, I’m wondering what is your view from a startup perspective? Do you think of Lyft as a startup anymore are they acting like a startup or are they acting like a company that could handle all of these different complicated, various challenges? I mean, we’ve got pricing pressure, regulatory pressure or you’ve got AV development, opportunities with scooters and all this other stuff. So are they acting like a company that is able to handle this?

Image via Getty Images / Jeff Swensen

Kate: That’s an interesting question. I mean, they’re definitely not a startup anymore by, by anybody’s definition. You maybe could have still used that word, if they were still private, but even then, I know many people would yell at you for using that term for a company worth $15 billion. But now it’s a public company. It’s not a startup. I don’t think they’re acting like a startup, no. I think that they are mature in the way that they’re handling all of these different, so-called paths to profitability.

But we need to wait and see. Let’s see how this year goes, let’s see how they handle all the criticism that they’re going to undoubtedly take from Wall Street or from everyone who’s either interested in buying or just taking a seat and watching how the stock favors and then we’ll know what kind of lessons they took from all those years as a private company. Then we can decide if their behavior is really that of a mature public company.

Kirsten: I do want to make one point that I think is an interesting one on Lyft’s strategy versus Uber is in terms of AVs. Let’s all put a big asterisk that says no, AVs are still a ways out. It is important to note the Lyft and Uber’s strategies for AVs are wildly different and Uber does not take this dual approach. Uber is throwing a ton of capital towards developing their own, self-driving stack and also they’ve done, some acquisitions as well.

They’ve also had quite a bit of trouble. Last year Uber had the first self-driving vehicle fatality that happened in Tempe, Arizona, which looked like it was going to derail their self-driving unit, but it did not. They’re back, testing in a very limited way, but Lyft’s is all about what they call the democratization of autonomous vehicles.

And we can look at that as marketing speech, but I do think that it’s important to look at those words because it shows what their business model is. Their business model is partnerships, alliances, opening up the platform and casting the widest net possible. What I’m very interested to find out is which approach will end up being the winner. It’s going to be a very long game. It’s not going to be anything that’s going to be determined in the next year. I think what Lyft’s proven is that when they look like they’re down and out, they come back.

We’ll see what the better approach is. Do you do everything in-house and launch your own robo-taxi service? Or take capital partners on or do the Lyft approach, with multiple partners? Are partnerships actually too complicated? As someone who covers the startup world, do you have a thought on which one might work or not?

Kate: I have no idea which will work better and I’m sort of excited to see where this all goes, especially as Uber and Lyft are now going to be public.

That’s a good spot to end the call on.

Kirsten: Thanks so much for joining. Thanks again for being Extra Crunch subscribers, we really appreciate it. Bye everyone.

Hong Kongs IPO Takeoff Is Running Out of Runway

Brace, brace. Hong Kong’s IPO takeoff is going to come to a screeching halt.

There’s a flood of deals still in the pipeline, it’s true, from food delivery giant Meituan Dianping to biotech unicorn Innovent Biologics Inc. But investor fatigue is setting in, with many of the hot sales that helped to reignite the market in the past year trading below their offer prices or showing lackluster gains.

China Tower Corp. closed unchanged on its debut Wednesday after completing the world’s biggest initial public offering in two years. That mirrors the performance of smartphone maker Xiaomi Corp., another keenly anticipated listing that’s little changed a month after it started trading. Ascletis Pharma Inc., a Hangzhou-based maker of HIV drugs, has slumped 20 percent since making its entrance at the end of July. 1

Even the online insurer that sparked a revival of Hong Kong’s IPO frenzy is in the red. 

In the Red

The bulk of major Hong Kong IPOs in the past year are trading under water

Source: Bloomberg

Note: China Tower and BeiGene started trading in Hong Kong on Wednesday.

ZhongAn Online P&C Insurance Co., a company backed by internet behemoths Tencent Holdings Ltd. and Alibaba Group Holding Ltd., surged on its debut in September, but now stands 42 percent below its price on listing. Two-thirds of IPOs that raised more than $1 billion in the two years ended July 2017 were below their offer prices after six months; three-quarters had dropped after a year, data compiled by Bloomberg show.

Ironically, the cause of the pain can be traced partly to measures Hong Kong Exchanges & Clearing Ltd. has taken to fight back against a U.S. market that was luring away China’s new-economy stars. Under Chief Executive Officer Charles Li, the exchange operator opened the gates to both dual-class stocks such as Xiaomi and “pre-revenue” biotech firms such as Ascletis. 

The promise to IPO hopefuls was simple: List in Hong Kong and get access to the trading pipes that allow investors in mainland China’s partially closed capital markets to buy into the city’s stocks (another Li initiative). Often unable to list at home, this offered a way for Chinese pharma and tech companies to tap the wall of mainland investment money. It also helped Hong Kong to regain its crown as the world’s biggest biggest IPO fundraising venue.

Leading Edge

Hong Kong is the world's top venue for IPO fundraising this year, beating New York and Nasdaq

Source: Bloomberg

Note: Indian fundraisings are on the National Stock Exchange.

Hong Kong’s pitch also held out the prospect of a more direct route back into the mainland stock market, via China depositary receipts, though this didn’t pan out as hoped. China decided that CDRs were a concept whose time hadn’t yet come, forcing Xiaomi to postpone a sale that it had planned to conduct simultaneously with its Hong Kong IPO. That’s not all: China’s stock exchanges subsequently said they wouldn’t let mainland investors buy shares with weighted-voting rights, closing Xiaomi off from the Shanghai and Shenzhen stock connects.

The takeaway? Hong Kong probably isn’t ready for companies that have yet to turn a profit. The two big gainers among listings since mid-2017 are Chinese new-economy firms that are making money: Tencent-backed online bookstore China Literature Ltd.  and biotech WuXi Biologics (Cayman) Inc. 

A biotech firm that’s further along than Ascletis in clinical trials, such as Innovent, may win more fans, but even that’s no guarantee. Cancer drug developer BeiGene Ltd. dropped on its debut Wednesday.

America First

Three of the top 10 IPOs in the U.S. in the past year were Chinese tech companies; only Qudian has fallen

Source: Bloomberg

Note: iQIYI, Pinduoduo, and Qudian are all Chinese new economy firms.

Chinese IPOs tend to be smaller in the U.S. but their performance has been better, with lack of profitability no bar in a market that prizes growth. Conversely, earnings are no shield when growth prospects dim: Qudian Inc., a Beijing-based online lender that is profitable, plunged by more than half since March amid a regulatory crackdown on the industry.

The lesson for China’s budding new-economy stars is that Hong Kong may not be worth the hassle. And for the city’s IPO investors: Stick to firms that are already in the black.

  1. Barring very weak demand, new listings don't tend to fall much in the first month as bankers stabilize their prices.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan at

To contact the editor responsible for this story:
Matthew Brooker at

Excavator Stocks Can’t Climb Out of the Hole

Calling the turn in industrial cycles isn't easy. It looks like investors in the beaten-down machinery sector have decided to stop trying.

Wade past the impact of the trade war and its potential collateral damage, and conditions are looking up. U.S. bellwether Caterpillar Inc. sounded an optimistic note in results last week, as did its typically cautious Japanese industrial machinery peers, which have businesses spanning the globe. It was a quick reversal from the dismal tone that alarmed investors just months ago.

But there’s a disconnect between the views of companies and of markets. Stock prices of industrial machinery makers remain down 20 to 30 percent this year, almost entirely unmoved by the latest crop of upbeat results and forecasts.

Drilling Down

Infrastructure-related machinery makers have struggled to get investors' love this year

Source: Bloomberg

Take Komatsu Ltd., for instance, which said it expects operating income to be up around a quarter in the fiscal year ending March 2019. The maker of excavators and bulldozers maintained its fiscal-year forecast for construction and mining equipment demand, seeing a 5 to 10 percent gain across all its regions. The Tokyo-based firm’s operating profit margin was almost 15 percent in the first three months, up close to 6 percentage points from the previous quarter. At the same time, its book-to-bill ratio – a proxy for supply and demand – remained in balance.

Digging a Deep Hole

Komatsu is trading at a steep discount to its long-term average, at odds with the underlying industrial cycle

Source: Bloomberg

Investor intransigence partly reflects a failure to differentiate. Mining and agricultural equipment, along with machinery for North American oil and gas, are in a better place than, say, construction machinery, as capital expenditure cycles diverge. Australian and Latin American demand for mining machinery is showing signs of a recovery, as is Indonesia.

There are more positive signs. Chinese stimulus will spur construction demand. At the same time, a longer-term boost could come from Japan, where the government is discussing manufacturing subsidies and a corporate tax cut for companies that raise wages and embrace technology.

Reflecting the optimistic mood, Hitachi Construction Machinery Co. predicted a 70 percent jump in mining revenue despite a strong yen. The segment accounts for 15 percent of the Japanese firm’s total revenue.

Caterpillar also offered a solution for the potential impact of tariffs, which it estimates at $100 million to $200 million, saying it will raise prices and further cut costs that are already at their lowest in years as a percentage of net sales. The company has already booked in orders for delivery next year.

To be sure, there’s always the risk of a sudden upset: a slowdown in China, in commodities, in global economic growth, you name it. But given the way things are moving, the view of markets is unduly dire.

These companies are trading at a 40 percent discount to their long-term price-earnings average. That puts Komatsu and Hitachi Construction at the levels they were at five years ago, when the cycle was at a trough and global growth remained in a funk.

Careful Construction

Japanese machinery giants have been able to keep capital spending low as a portion of their net sales while returning better-than-expected results

Source: Bloomberg

Fast forward to 2018. Returns on invested capital are on the rise, at between 6 percent and 10 percent, versus 3 percent to 7 percent five years ago. The companies are taking each dollar further, while keeping capital spending as a percentage of sales low. Their weighted average cost of capital has also fallen. Basic finance theory would tell you these firms are indeed creating value.

Returns, No Rewards

Return on capital for Japan's industrial machinery companies shows they have been investing profitably

Source: Bloomberg

Yet shareholders aren’t rewarding them. Machinery giants’ ratio of enterprise value to invested capital – a measure that indicates the value investors ascribe to each dollar of capital the companies invest – is close to levels in 2009, amid the great financial crisis. 

Down But Not Out

Japan machinery giants aren't getting much credit this year, with their enterprise value to invested capital* multiples trending down

Source: Bloomberg

*excluding cash.

Perhaps investors know something about the cycle that isn’t showing up in economic indicators or in what companies are seeing on the ground. The other possibility is that they’ve given up too early. This improvement looks like it has some room to run.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Anjani Trivedi at

    To contact the editor responsible for this story:
    Matthew Brooker at

    Finally a Good Place to Put Your Bitcoins

    Oil is a perfectly normal thing for an institutional investor to invest in. “I think oil prices will go up so I’m gonna buy some oil”: very common thought process. But if you are a hedge fund, or a pension fund, or an endowment, and you think oil prices will go up, and you want to buy oil, you have a bit of a problem, which is: Where will you it? Oil is … slippery? “It is also highly toxic, very difficult to store, and it smells bad,” my Bloomberg colleague Tracy Alloway once wrote. “Don’t try to buy a barrel of oil,” a broker told her; “It’ll kill you.” 

    But people want to buy oil, and financial markets abhor a vacuum, so there are ways for them to buy oil. Chiefly institutional investors buy oil , which allow them to bet on the price of oil without actually having to put smelly barrels in their garage. Futures are non-toxic and odorless, and you can store them in a computer. But of course some institutions—mostly specialists in energy trading—go and trade actual physical oil, and have the … tankers or ventilated warehouses or whatever … necessary to store it. And their trading—buying futures and selling physical oil, or vice versa—is what keeps futures prices in line with the actual price of oil. They provide, if you will, synthetic oil storage: If I want exposure to the price of oil without storing it, I buy futures, and the person who sells me the futures might be an arbitrageur who is hedging by buying and storing the oil herself. 

    Bitcoin is also, as far as I can tell, slippery, toxic, very difficult to store, and it smells bad. In particular, the history of Bitcoin involves a lot of incidents of:

    1. People losing or forgetting their private keys and being unable to access the Bitcoins they store directly in a Bitcoin wallet; and
    2. Exchanges getting hacked and losing the Bitcoins that they were storing for their customers.

    If you are a person who is enthusiastic about Bitcoin, that is I suppose all part of the fun of investing in a novel censorship-resistant decentralized form of currency. But if you are an institutional investor, losing your Bitcoins because you forgot your private key, or because the exchange where you stored them got hacked again, is a bad look. Your clients will be unimpressed. This reality limits the ability of institutions to buy a lot of Bitcoin.

    And now it’s changing:

    “There are a lot of investors where custodianship was the final barrier,” [Multicoin Capital partner Kyle] Samani said in a phone interview. “Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”

    Samani has been “testing Coinbase Inc.’s new crypto custody service, one of scores of such offerings in development.” 

    Such projects would pave the way for vast tracts of investors to expand into crypto, potentially reviving prices in markets that have tumbled in recent weeks. Regulated crypto custody would allow more institutional buyers — such as hedge funds and pensions — to invest in Bitcoin, Ether and a multitude of other coins. Retail brokerages would have a safer way to let clients add crypto to portfolios stuffed with stocks and bonds.

    And the services would provide peace of mind to Samani and other fund managers who’ve already waded into the market. Most investment advisers are required by the SEC to keep client funds with a qualified custodian.

    Of course if the fate of all Bitcoin exchanges is to be hacked, then I am not sure that certification by the Securities and Exchange Commission will change that, and I look forward to the first qualified institutional Bitcoin custodian being hacked. 

    Remember, like, six months ago, when Cboe Global Markets Inc. and CME Group Inc. introduced Bitcoin futures? Part of the appeal of Bitcoin futures was that they would provide a convenient way for institutional investors to get short Bitcoin. But another part of the appeal—I still think the dominant part—was that they would provide a convenient way for institutional investors to get Bitcoin. Just as with oil, if you are an institution, you can buy Bitcoin synthetically in the form of futures, and be exposed to its price movements, and let someone else—the person on the other side of the futures trade—worry about how to store the Bitcoins. You avoid the problem of custody by owning your Bitcoins synthetically. The Bitcoin futures, it seemed to me and a lot of people, “would pave the way for vast tracts of investors to expand into crypto,” boosting prices as institutional investors could finally get safe clean regulated exposure to Bitcoins.

    And then Bitcoin futures started trading, and they were pretty tiny in comparison to the volume of actual physical Bitcoin trading, and the price of Bitcoin promptly fell off a cliff.

    So I don’t know! Institutional-grade custodianship for Bitcoin seems like a good idea. But I have been burned once before. Providing the legal and regulatory and compliance tools for institutional investors to buy Bitcoins is, you know, fine. But if that’s all it took for a vast wave of pent-up institutional demand to come rolling into Bitcoin, that would have happened by now.

    This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

      To contact the author of this story:
      Matt Levine at

      To contact the editor responsible for this story:
      James Greiff at

      Follow-the-Leader Is Fast Becoming a Loser’s Game in the Stock Market

      Follow-the-Leader Is Fast Becoming a Loser’s Game in the Stock Market

      • Industries beating market for two months hover near record low
      • Buying winners in doubt as momentum ETF saw biggest outflows

      Finding a leader to follow has rarely been this tough for stock investors.

      From tech giants to banks, the market’s shining stars have fallen back to Earth one after the other, with few holding to the top spot for very long. The latest flameout? Chipmakers. The Philadelphia Semiconductor Index has dropped almost 8 percent in four days, leaving it essentially flat for the year like the rest of the market. At this year’s peak in March, the chip gauge’s 2018 gains were four times the S&P 500 Index.

      That the market leadership is more fleeting than ever is perhaps best illustrated by a Morgan Stanley study tallying the number of S&P 500 industries that outperformed over two consecutive months. Around 15 percent at the end of March, the proportion of winning groups hovered near the lowest level in at least 40 years.

      “Leadership changes are afoot below the surface and portfolios need to adjust,” Mike Wilson, an equity strategist at Morgan Stanley, wrote in a research note. “The bigger challenge is trying to decide what to own as leadership is changing.”

      Wilson recommended favoring energy stocks over chipmakers amid higher oil prices, while demand for handsets and crypto mining chips probably peaked. Investors should stick to banks as the industry will regain leadership while Treasury yields keep rising, he said.

      As market leaders continued to falter, investors seem to be questioning the strategy of chasing winners. The iShares Edge MSCI USA Momentum Factor ETF lost almost $500 million last week, the biggest withdrawal since the fund was started in 2013.



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