Underwriters priced the initial public offering (IPO) of Lyft, Inc. (LYFT) at $72 per share on March 28, one day before the ride-sharing company opened on Nasdaq at $87.24. The media posted euphoric headlines about the first day of trading even though the stock fell eight points in the first hour and ended the session nearly ten points lower than the opening print, trapping retail buyers with major losses right out of the gate.
Wedbush Securities proclaimed the Lyft IPO a major success, describing it as a "watershed event" for the tech sector, with ride-sharing one of the "most transformational growth sectors of the U.S. consumer market." The New York Times also chimed in, insisting that unsettled labor issues induced investors to dump positions late in the day, but the reasoning made no sense given that all risk factors were public knowledge prior to the offering.
Lyft stock has dropped another 18 points in the past two weeks, adding to fears that it has entered a steep decline similar to Facebook, Inc.'s (FB) botching of its 2012 public offering. Facebook stock opened to a standing ovation in the mid-$40s that morning and sank like a rock, dumping 60% in the next 16 weeks. However, it's too early to declare Lyft's public offering a failure because Wall Street greed is the likely culprit for lower prices, not the company's long- or short-term outlook.
Underwriters book huge profits for themselves and insiders subscribed to IPOs when they stir up public demand, raise offering prices and sell secondary shares permitted under the agreement. This conflict of interest has been in place for generations, forcing many offerings above fair value just in time for the retail crowd hypnotized by media hype to place orders at or above opening prints. Underwriters use this rocket fuel to push prices as high as possible and then let the market deal with supply and valuation issues – whether its takes a day or a lifetime.
Snap Inc.'s (SNAP) March 2017 IPO shines as an extreme example of this self-serving process, coming public at $24.00 after being priced at $17.00. The stock traded above the opening print for just two sessions and turned tail, entering a major decline that relinquished 80% of its value. The stock traded briefly above the underwriter's price tag in February 2018, inducing the media to falsely state that buyers were "made whole" even though the retail crowd still incurred huge losses.
Lyft Short-Term Chart (2019)
It isn't too early to examine intraday patterns and make short-term predictions, but more detailed technical analysis can't be applied without a longer-term price and volume history. The stock gapped down between $78.50 and $75 on April 1, while a bounce four days later reversed before filling the big hole, reinforcing resistance. Lyft stock has lost ground in three selling waves since that time, perhaps carving an Elliott five-wave decline that could now yield a stronger recovery wave.
Secondary resistance has set up at $67, marking the April 10 breakdown through the April 1 low. That price level will narrowly align with the 50% retracement of the three-day sell-off if the stock bounces right here. Meanwhile, enough 15-minute bars have printed to establish the 50- and 200-bar exponential moving averages (EMAs), with "short-term" resistance near $65 and "long-term" resistance near $67. Look for a rally above the 200-bar EMA to trigger a bullish shift in sentiment, inducing Wall Street's usual suspects to jump onto CNBC and Fox Business proclaiming a rapid ascent to new highs.
The Bottom Line
The Lyft decline follows in the footsteps of other poorly managed initial public offerings, trapping retail investors after rewarding the minority of individuals who paid the offering price rather than buying after the opening print.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.