Tech unicorn Lyft, the Pepsi to Uber’s Coca Cola, listed on the NASDAQ last week. After an opening day surge of 8% on Friday, by Monday the stock had plunged 12% and closed below its IPO price. While many analysts remain positive about the stock, plenty of others aren’t, and many commentators seem to have struggled to fully explain why such an anticipated stock debut has so far disappointed.
I’m no stock picker (and just as well frankly) but I haven’t found this result at all surprising given the histories and strategies of Lyft and Uber. In particular their intellectual property (IP). While these two companies have valuable IP, it’s simply not valuable enough to justify the expectations we’ve seen.
Lyft and Uber have always insisted they are first and foremost in the IP business, that is software, technology plaforms, etc. While they are operating in the transportation industry, they have no interest in owning any of the physical assets required to do any of the actual transporting. Nor directly employing the people who operate those assets.
So that’s why on paper you have a business that’s minimising its fixed costs (all those expensive lumps of steel and payroll costs) and focusing on developing exciting tech and software IP.
However if you don’t actually have any physical assets then your only value is in the IP you create. Developing sophisticated ride-hailing software is without question a complex and difficult task, but there are only a limited number of other entities that would ever be interested in acquiring or licensing that software given how specialised it is. The potential market for this IP simply isn’t that big.
And that’s not even getting to the point that because you’ve chosen not to own the physical transportation assets, they, like your customers, could very easily be tempted away very quickly by a competitor who decided for whatever reason to aggressively court their cars and their skills (drivers) and their money (customers).
Yes the value of Lyft (and of course their IP) isn’t nothing. Far from it. There’s very good business to be made in moving people about. That’s why it’s such a brutally competitive marketplace. But if they have no ownership and little long term control over their assets together with such specialised IP then the sky definitely isn’t the limit when it comes to valuation.
They’re in a bind. They can’t have physical assets if they’re an exciting IP business, but their IP isn’t perhaps as exciting as all that in the end and they have few other assets to underpin their value.
So good but not great IP. What is the best kind? Original research and ideas that are unique and you can defend. The stuff that really has some kind of secret sauce. The epitome of that? Art. The owners and custodians of say The Beatles or Star Wars or Harry Potter are all world class at what they do. But imagine for a moment that they weren’t - the underlying value of any of these would still be huge, just waiting for someone to come along who did know what they were doing.
That’s the really exciting kind of IP. It’s also the rarest and far and away the hardest to create.