Mailbag: The Logic Behind Lyft’s IPO, Investing in Precious Metals

Q: I don’t get initial public offerings (IPOs). Levi Strauss actually makes something, and it’s profitable. But Lyft, a company that basically makes an app that links people together and loses money, gets all the attention. What gives?

A: It sounds crazy. Rewarding startups with a rich IPO – in Lyft’s case, $23 billion – for losing nearly $1 billion last year seems asinine. I know what you’re thinking: I could do that. Give me that $23 billion.

But in startup land, it actually makes sense. I’m not saying it’s right or wrong. I’m saying only that there is a logical argument based on the following tenets…

  • Grow and they (investors) will come. Facebook did it. So did Amazon and Alibaba. They turned mind-blowing and money-losing growth into hugely profitable businesses… down the road. As young startups, they all lost money. The underlying belief here is the larger the customer base, the more potential for big profits. Sometimes it actually works out that way. Lyft’s revenue shot up from $343 million in 2016 to $2.2 billion in 2018.
  • Attack a huge market ripe for change. Americans spend $1.2 trillion annually on personal transportation. And Lyft is responding, providing more than 1 million rides a day. And it’s live in 300 cities in the U.S. and has also expanded into Canada.
  • Become a market dominator. The $670 million in revenue Lyft made in the fourth quarter of 2018 falls far short of Uber’s $3 billion during the same period. But what startup wouldn’t want to be No. 2 in a huge and growing market? Besides, while Lyft’s revenue growth is accelerating, Uber’s is slowing. Lyft is establishing itself as a market dominator in the ride-hailing space for years to come.
  • Grow for decades. This is one of Jeff Bezos’ favorite criteria. Tom White, senior vice president of D.A. Davidson, says that Lyft could achieve a 31.4% bookings share by 2029 (versus an estimated 14.9% share today). Well, that’s 10 years of growth. (Though for me, that’s not enough. I’d be satisfied only with strong growth from Lyft for the next 15 to 20 years.)
  • Identify a pathway to profits. Lyft is not making nearly as much as it spends. But how about the future? Lyft won’t (can’t?) say when it will turn a profit. But since the company plans to invest heavily in technology like autonomous vehicles, I think it’s counting on that as a path to profitability.

Lyft will realize its massive potential only when it figures out how it can become profitable… at some point. It won’t happen this year. And I can’t see it happening within the next two years.

But investors are making a $23 billion bet that Lyft will eventually figure it out. I, for one, seriously doubt it.

+ Early Investing Co-Founder Andy Gordon

Q: Adam, do you like gold or silver as an investment?

A: I do indeed like precious metals, especially right now. And it’s for the same reason I like the more speculative fiat alternatives like bitcoin: I don’t trust fiat money.

U.S. stocks are pricey after a massive 10-year run, and the global economy seems to be stagnating. We’re overdue for a slowdown.

When things slow down, the Fed tends to respond by lowering interest rates. But interest rates are already low. I don’t think this will stop the Fed from going back to zero if it thinks it’s necessary or from trying other measures. It’s very creative.

Although it’s sometimes hard to tell, we’re still in a debt bubble that’s been building for decades. And it’s now getting up to dangerous levels. Interest payments on the $21 trillion of U.S. federal debt totaled $523 billion in 2018.

U.S. personal (household) debt is now $13 trillion, and corporations have $9 trillion in debt. Both are at record levels.

Eventually, there will have to be a lot of inflation or currency revaluations to deal with this debt. The alternative would probably be a deflationary collapse, and I don’t think the Fed will ever let that happen.

Instead, monetization of debt seems likely. The Fed would essentially buy bonds to fund the government with newly printed money. I think it’ll try to inflate away the debt.

It’s essentially MMT (Modern Monetary Theory), and I think it’s going to be real in the (somewhat) near future. Unfortunately, I simply don’t see the government cutting spending enough to produce a responsible outcome.

+ Early Investing Co-Founder Adam Sharp