Three days ago, I wrote about Lyft and the Greenshoe Option
Wall Street Secrets Revealed #7 – The Greenshoe Option
But the Greenshoe option is really a price stabilizer, to ensure that price doesn’t fall below the IPO price. When a company’s stock price falls below the IPO price, the IPO is considered “broken,” the company and investors are disappointed and the lead underwriter suffers reputational damage.
So if the company’s stock price breaks or falls below the IPO price, the underwriters will buy shares back from the market at the IPO price, which helps to stabilize the price and also removes shares from the market, causing the balance of demand and supply to hopefully reach equilibrium. However, once all of the oversold shares are bought back and if there is still selling pressure, the underwriters stop the stabilizing process, causing the stock price to break the IPO price. And that’s what happened today with Lyft.
Wednesday was the first settlement day for Lyft shares and hedge funds were salivating at the opportunity to short the stock. Short sellers shorted over 6 million shares which represented about 20% of the available shares outstanding.
NOTE: when you short a stock, you are borrowing the shares from a broker, then selling them on the open market, in the hopes of buying them back at cheaper prices later, returning them to the broker and profiting from the difference.
The day prior to yesterday, Lyft received their first “sell” downgrade
Michael Ward of Seaport Global Securities initiated coverage of Lyft LYFT, +2.48% with a sell rating, writing that Lyft’s current valuation bakes in “overly optimistic” assumptions about the transformational nature of ride hailing. He set a $42 price target on the shares, which is 42% below the initial public offering price of $72.
“In order to justify its current market valuation, investors need to take a big leap of faith that the millennials and later generations will forego ownership of a car and opt instead for reliance on a ridesharing service,” Ward wrote in a research note. “Despite the optics of vehicles being an underutilized asset, we believe people will continue to own their own vehicles as primary transportation and instead rely on the ridesharing services as a convenient supplement.”
Carl Icahn is looking like a genius. His company purchased a $100-million stake or a 2.5% stake in Lyft in 2015, but sold it prior to the IPO for $550 million to hedge fund billionaire George Soros.
All of this comes on the heels of what was thought to be a great IPO, but a questionable path to profitability. Although sales more than double to $2.2 billion in 2018, it lost about $911 million and lost another $708 million in 2017. Will Michael Ward of Seaport Global Securities be right about Lyft falling to $42, stay tuned?
This post is my personal opinion. I’m not a financial advisor, this isn’t financial advise. Do your own research before making investment decisions.