Letter to Lyft Employees - Thoughts on Navigating Risks & Opportunities Ahead

David Hale & Eric Jardine |
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Dear Lyft Employees,

Congratulations on your IPO! You have accomplished a tremendous amount so far. It isn’t every day a company goes public. 528% revenue growth in three years is no easy task1. The goal of this article is to help you make informed choices about what to do with your stock when the trading window opens. Lyft’s stock is scheduled to start trading this Friday, March 28th. And 6 months later, those who are fully vested via the IPO are free to sell2. Over the next few months, you have a lot to consider. Namely, how much, if any, stock to sell. This decision should incorporate several factors such as: When do I want to retire? Do I want to buy a house? A car? Pay for a wedding? Send kids to college? You should also consider factors that will probably impact Lyft’s stock price over the next 12 months and have a view of how attainable its long-term business goals are.

If we were in your position, here are the things we would be focusing on:

Stock Dynamics Over the Next 12 Months

Public market investors — Investors may treat you well on the first day of trading, but they may also over-react to Lyft’s first sets of quarterly results. Lyft has a variety of new businesses being rolled out, and investors will be paying extra attention to their progress. Fairly or unfairly, those initial results can get extrapolated well into the future. This could impact Lyft’s share price meaningfully.

Uber will be public — A few weeks after your IPO, Uber will be trading publicly3. It is possible that investors decide they’d prefer to own Uber over Lyft. If that is the case, it will impact your stock price. However, our base case assumption is that long-term growth investors will want to own both, because they ultimately want exposure to the kind of transportation vision John Zimmer laid out in 20164. So, barring major missteps in Lyft’s first few quarterly reports, we doubt Uber is much of a threat to Lyft’s stock price.

Lock-up expiration — 181 days after the IPO, vested employees will be able to sell5. Should you sell right at that time, or wait? Predicting the future is hard and a myriad of factors determine market prices. However, assuming we are still in a bull market at lock-up expiration, a big if, it is probably better to wait. Why? Newly public companies tend to be volatile in their first six months of trading. Even the most successful IPOs of the past 5 years only realized an average of 10% of their ultimate value by lockup expiration6. Facebook made its lows just before its lock-up expired7. If you must sell, developing a strategy that accounts for this would be a smart thing to do.

Lock-up expiration trading dynamics –At lockup expiration, typically a great deal more stock becomes eligible for sale than was initially listed at IPO8. This is a common practice. Yet, it can create supply/demand imbalances (more sellers than buyers) and poor share price performance in the days heading into and after the expiration date9. Selling around this time, can make getting a fair price from the market more challenging.

Tax implications — If you have incentive stock options, your eventual sale will probably be taxed at long-term capital gains rates, unless the Alternative Minimum Tax (AMT) gets in the way10. If you have restricted stock, you will pay ordinary income tax at vesting and then long-term capital gains rates if you hold your shares for more than a year, also subject to AMT11. However, most employees, in part because they do not have cash on hand to pay the tax and also hold all of their stock, just sell enough stock around lockup expiration to cover the tax plus the cost of whatever they need the money for. Having a handle on possible ways to minimize the tax consequences of any selling you do, before pulling the trigger, would be smart.

After you’ve understood these trading dynamics, you should also develop a view on what may happen to Lyft’s business. Here is what we focus on:

Lyft’s Business

Lyft has a potentially massive addressable market. Here are the metrics we would focus on that would make us comfortable Lyft is gaining traction. Part of your decision to hold or sell a given percentage of your stock will hinge on whether you see these goals as attainable.

· Riders — As of Q4 2018, Lyft had 18.6 Million active riders12 and there are approx.. 253,327,493 Americans over age 1813. There should be room to grow the rider base for years to come. However, rider frequency, revenues as a percentage of bookings, and contribution margin are equally important and will also need to grow.

· Success of TaaS — Transportation as a Service (aka TaaS) is a relatively new market. In a nutshell, its long-term goal is to replace car ownership with short-term shared rentals of autonomous cars. Lyft believes a good deal of the $1.2 Trillion transportation economy is ultimately addressible14. With $2.15 Billion in 2018 revenues, there should be plenty of room to grow, particularly as new service offerings roll out.

Here are two ways we would measure Lyft’s traction within the TaaS market:

1) Autonomous vehicles — In addition to its other autonomous efforts, Lyft’s partnership with Aptiv in Las Vegas will bear watching15. In our view, investors will watch it closely and could extrapolate results into the future. If Lyft can build a sample size demonstrating safety and efficiency, it should earn favor with regulators. This should lead to wider adoption of autonomous transportation across the Lyft platform. And if this happens, revenues per booking and contribution margin should rise as a result.

From a long-term perspective, Lyft’s ultimate goal16 is to have some of its rides conducted autonomously within 5 years, with most of its rides autonomous within 10 years. And 15 years out Lyft wants autonomy to expand to other services, such as short and long-haul transportation and shared commuting. If Lyft can achieve these goals, its revenues as a percentage of bookings should increase substantially. If investors gain comfort that this is achievable it could move valuation meaningfully higher, because investors pay more for companies with higher margins17. The long-term effect on stock price, should this happen, would be significant.

Finally, if investors start to believe this can happen faster than the timeline Lyft itself has laid out, it could also have significant implications for Lyft’s stock price.

2) “Last mile” transportation — Today, bikes and scooters are Lyft’s current vehicles of choice for last mile, human transportation. Continued adoption by users and intelligent acceptance by regulators18 over the next 2–3 years will bear watching. If they can ramp meaningfully, it will be a strong positive.

Early reports indicating “last-mile” utilization rates are not growing as much as hoped19, and that theft, vandalism, and wear-and-tear are crimping margins20 are concerning. Meanwhile, regulators are focused on how to integrate them into existing transportation grids21. They may also have concerns about rider safety22.

To fully realize the TaaS vision, these issues with last-mile will need to be solved.

Call to Action/Conclusion

Lyft employees are in a great position. At this writing, the IPO looks to be oversubscribed23 and as shareholders you have meaningful opportunities ahead.

To make the most of your opportunity, first get a solid understanding of your personal and financial objectives, as well as your risk-tolerance. Then build an understanding of the trading dynamics that may impact your stock’s performance over the next 12 months or so. Finally, develop a view on Lyft’s chances of success within each of the respective verticals it is initiating — particularly autonomy and last-mile, and of the long-term growth potential of Lyft’s various profit margins.

Best wishes,

David N. Hale, CFP® and Eric Jardine, CFA®

Perigon Wealth Management

david@perigonwealth.com and eric@perigonwealth.com

David Hale is planner and adviser with Perigon Wealth Management and has been investing in IPO and Secondary Offerings on behalf of clients for nearly two decades.

Eric Jardine is an investment adviser with Perigon Wealth Management. He has over 15 years of experience investing across the capital markets as an analyst and portfolio manager.

Important Information

The views expressed in the referenced materials are subject to change based on market and other conditions. This content may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice, is not a solicitation to buy or sell securities, nor should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.

There are risks associated with investing in an initial public offering (IPO). Investors should read the offering prospectus carefully and make their own determination of whether an investment in the offering is consistent with their investment objectives, financial situation, and risk tolerance.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

Perigon Wealth Management, LLC (“Company”) is an SEC registered investment adviser located in San Francisco, California.

Sources/Further Reading

1. Lyft S-1, p. 73

2. Lyft S-1, p. 211

3. Carl O’Donnell, heather Somerville; Reuters; Exclusive: Uber plan sto kick off IPO in April; 3/14/2019

4. John Zimmer; President, Lyft, Inc.; The Road Ahead, 9/18/2016

5. Lyft S-1, p. 15

6. Factset & Perigon Wealth Management Research

7. Ibid

8. Lyft S-1, p. 211

9. Don Dion, SeekingAlpha Blog post, Recent IPOs Sink on Lockup Expirations, 10/24/2017

10. IRS Topic Number 427 — Stock Options

11. Equity (Stock) — Based Compensation Audit Techniques Guide (Aug 2015); IRS Website

12. Lyft S-1, p. 19

13. US Census, Quick Facts, All Topics

14. Lyft S-1, p. 4

15. Lyft S-1, p. 6

16. Lyft S-1, p. 134

17. Factset & Perigon Wealth Management Research

18. Kate Mancuso; The Rise of Electric Scooter Regulations; The Regulatory Review, Jan 3, 2019

19. Sam Korus; Electric Scooters: The Unit Economics May Spell Trouble; ARK Invest; Feb 19, 2019

20. Corey Weinberg; Scooters’ Worst Enemies: Wintry Weather, Vandals; The Information; Jan 21, 2019

21. Aarian Marshall; SF Is Bringing Back Banned Electric Scooters — With Limits; Wired; 8/30/2018

22. Andrew Blake; Electric Scooter Injuries Scrutinized in First-of-its-kind Medical Study; Washington Times; Jan 26, 2019

23. Reuters; Lyft’s IPO is Already Oversubscribed; 3/19/2019