Lyft Requires a ‘Leap of Faith’ for Investors With Shares Slumping

(Bloomberg) -- A day after dropping below its initial public offering price, Lyft Inc. shares were volatile Tuesday as more skeptics emerged on Wall Street.

Investors in the ride-sharing service “need to take a big leap of faith” to justify its current valuation, Seaport Global analyst Michael Ward told clients as he gave Lyft its first sell rating. The current valuation reflects an “overly optimistic view of consumer behavior” in the U.S. and expectations that millennials will forgo owning their own cars, Ward said. His price target on the stock is $42, or 39 percent below the last closing price.

Lyft shares fell as much as 4.2 percent in New York before paring losses and briefly trading higher. The shares tumbled 12 percent on Monday after multiple cautious analyst reports warned that the company’s growth may be poised to slow. Only two of the eight analysts tracked by Bloomberg have a buy recommendation on the shares.

Seaport’s Ward expects millennials and future generations will continue to own their own vehicles as primary transportation and rely on ride-sharing services as a convenient supplement.

Short-sellers are also expected to start circling soon. As long investors exit the stock, short interest should steadily increase as more and more shares become available. Early indicators are pointing to strong demand from short sellers, according to Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners.

Given Lyft’s IPO is widely expected to pave the way for a slew of unicorns debuting in the public markets this year, the slump in the stock has much broader significance beyond just the company. “This is a major gut check time for Lyft and the tech IPO world to see how this stock trades given it was the first one out of the box,” Wedbush analyst Daniel Ives wrote in a note to clients Tuesday.

To contact the reporter on this story: Esha Dey in New York at edey@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Catherine Larkin

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