Investors sue Lyft for overhyping IPO after shares fall by a third in two weeks

Investors sue Lyft for overhyping IPO after shares fall by a third in two weeks

The ride-hailing company’s share price has dropped from $78 to $58 since its IPO kicked off.

When Lyft went public last month, its first day of trading was strong, with its share price closing at $78.29. That’s $6.29 higher than its preopen share price of $72.

Then things took a turn. By day two, the ride-hailing company’s share price fell to $69.01. It’s been on a downhill slide ever since. As of Thursday’s close, Lyft’s share price was $58.36.

On Wednesday, investors filed two separate proposed class action lawsuits against Lyft, according to Bloomberg. They allege the company misrepresented its market position when it went public saying it dominated 39% of the ride-hailing market when it might actually be less. The cases were filed in San Francisco’s state court where Lyft is headquartered.

Lyft was the first tech unicorn to go public in 2019, a year that’s predicted to be full of Silicon Valley initial public offerings. Lyft rival Uber publicly filed with the US Securities and Exchange Commission last week for what could be the largest IPO in US history. In the days following Uber’s filing, Lyft’s stock dipped dramatically to an all-time low of $56.11 on Monday.

A Lyft spokeswoman declined to comment on the lawsuits.

Why have the Lyft stocks plummeted and why is it important?

The price of Lyft shares at the initial public offering was $72. Currently, the stock is trading below the $60 mark. Several things made the price go down. The major negative factor was that the company’s main rival Uber Technologies Inc. also filed for IPO. In addition, investors have recently sued Lyft claiming that it overstated its market position.

Why it matters for investors in Lyft

There are 2 separate class-action complaints against Lyft, as well as its officers and directors and underwriters. According to investors, the firm exaggerated when it said that its US market share was 39% and didn’t inform that it was about to recall more than a 1,000 of the bikes in its rideshare program.

Wall Street analysts keep worsening their forecasts for Lyft. The biggest problem is uncertainty: the company is unprofitable and because of the rigorous competition with Uber, it’s difficult to predict how much it will cost to acquire new customers and retain the existing ones as well as drivers in the future. Lyft had a net loss of $911 million in 2018, a 210% increase from the figure of 2017. The rising insurance costs represent a major issue as they comprised 27% of the company’s revenue last year.

The ridesharing market is growing fast and has immense potential. On the one hand, this is good. However, it may also attract other players as well, and for now, it’s questionable whether Lyft will manage to stay in the second place after Uber.

Why it matters to traders

Although the price of Lyft’s stock has significantly fallen, it doesn’t seem wise to try to catch falling knives: given the company’s situation, going long is risky.