Today, we’ll discuss valuations and their effect on share prices, with focus on the Lyft stock.

What The Heck Is Valuation?

Valuation is a figure that measures a company’s financial value. Investors need to determine market value in order to ensure that they’re getting a fair deal. There is no set formula to determine valuation. In fact, underwriters spend millions of dollars every year pricing private companies for investment. Underwriters need to put a numerical value on everything the company has, including both tangible and intangible assets. As a result, private valuations are interpretive, and public markets often have their own ideas about what a company is worth.

Valuation vs. Market Cap - Lyft Stock

In public markets, market capitalization measures the actual market value of a company. There’s no room for interpretation, the market cap is set by the public market and can be determined with a simple equation.

Market Cap: Outstanding Shares x Share Price = Market

To determine market cap, simply multiply the number of outstanding shares by share price. The product of these two numbers tells you a company’s total market cap.

Lyft Stock Valuation

Underwriters valued Lyft at roughly $24 billion. That valuation raised some eyebrows on Wall Street. After all, Lyft completed a round of private financing last August that valued the company at $15.1 billion. Let’s take a look at how share prices change based on valuation.

IPO price: (Outstanding shares)273.1 million x $72 =  $19.6 Bil.

Public Open: 273.1 million  x $87 = $23.8 Bil.

2018 Valuation: 273.1 million  x $55 = $15.1 Bil.

As you can see, the 2018 private valuation priced shares at about $55. Lyft stock began trading on the open market at over $87 per share. That’s more than a 50% mark up over the private valuation in 2018, less than 9 months ago. Keep in mind, Lyft lost $900 million last year and they have no clear plan for profitability. It would seem that Lyft and its underwriters got greedy and priced this IPO poorly.

Lyft Stock Price Action And Key Price Points

Unfortunately, retail investors got left holding the bag. If you made an investment in the Lyft stock when it hit public markets, you lost over 13% of your principle by the end of the session

Even though the share prices recovered a bit in the first week, Lyft started its second week of trading dropping like a hot back of rocks and looks like it could be heading down towards the $55 point it was originally priced at. This whole fiasco has also made both Pinterest and Uber to lower their IPO valuations as well.