Wall Street Secrets Revealed #7 - The Greenshoe Option

in #investing2 years ago


Lyft’s stock began trading close to $90 on Friday, but quickly retraced and closed at $78.29. On Monday, price fell again as institutional investors are questioning the company’s long term profitability in the soon to be era of autonomous vehicles, closing the day at $69.01, below the IPO price of $72.


In 2018, Lyft’s revenue more than doubled to $2.2 billion from $1.1 billion in 2017, according to its filing. But losses mounted, rising to $911.3 million last year from $688.3 million in 2017, though they declined as a percentage of revenue. Total costs and expenses were $3.1 billion in 2018, up 77 percent from $1.8 billion in 2017. The company has not laid out a timeline for when it will turn a profit.

Source

Like Equity Markets, IPOs are designed to go up through the Greenshoe option.

The Greenshoe option, is an over-allotment, typically allowing underwriters to sell up to 15% more shares than the original amount set by the issuer if demand far exceeds supply. If the stock price goes up, then the underwriters must deliver those oversold shares. All the underwriters do is exercise the over-allotment option and receive the shares from the option to cover the over-selling.

But the Greenshoe option is really a price stabilizer, to ensure that price doesn’t fall below the IPO price.  When a company’s stock price falls below the IPO price, the IPO is considered "broken," the company and investors are disappointed and the lead underwriter suffers reputational damage.

So if the company’s stock price breaks or falls below the IPO price, the underwriters will buy shares back from the market at the IPO price, which helps to stabilize the price and also removes shares from the market, causing the balance of demand and supply to hopefully reach equilibrium.  However, once all of the oversold shares are bought back and if there is still selling pressure, the underwriters stop the stabilizing process, causing the stock price to break the IPO price.  And that’s what happened today with Lyft. 

Lyft said 18.6 million people took at least one ride in the last quarter of 2018, up from 6.6 million in late 2016.

And that’s exactly why they went to Wall Street. To acquire capital to continue to grow, so more people utilized their services, decreasing the cost / ride, hopefully leading to a profit…yes this is a scaling model or economies of scale like we all learned in school.

Will the tide turn for the stock price? Will Lyft ever make a profit? Only time will tell, but be sure I will keep you updated.

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This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.


Published by Rolland Thomas
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with SteemPress
https://mentormarket.io/stocks/rollandthomas/wall-street-secrets-revealed-7-the-greenshoe-option/


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This is an interesting play as many other past IPOs had sloppy starts as well. I remember the horrible starts for Facebook and Twitter which took a couple of quarters to prove their strategies of monetizing their bases.

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It's really just another example of the Smart Money selling to the retail investor.

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