3/29/2019 Weekly Update: Lyft IPO, A Study on Capitalism
by Zach Marsh on Jun 7, 2019
S&P 500 +1.2%
10 Year Treasury +0.31%
Weekly Update: Lyft IPO, A Study on Capitalism
The big market news this week is that Lyft, Uber’s ride sharing competitor, completed its IPO filing this week and will be priced at $72/share, giving it a valuation of $24 billion. Due to the high valuation, high anticipation, and inability of the company to so far to actually make money, many people are wondering if this is just another repeat of the late 90’s tech bubble. But I actually think that it provides an interesting illustration of the elegance, opportunity, and ingenuity of capitalism.
Capitalism has gotten a pretty bad rap lately. The ironically-named progressives in the Democratic Party have frequently used capitalism as the scapegoat for all things wrong in our country. While, capitalism is far from perfect it does get a number of things right—and does so naturally. Winston Churchill once said, “Democracy is the worst form of government except for all the rest.” He could’ve just as well been talking about capitalism. Capitalism, at its best, is responsible for nearly all the progress that we witness in the world today. Arguing against capitalism is essentially and argument against progression. Through that prism, the Unabomber was essentially an anti-capitalist terrorist. That is why I believe calling the likes of Alexandria Ocasio-Cortez a progressive is like calling shrimp jumbo—it’s a misnomer.
But back to Lyft. There are two ways to look at the capital markets treatment of companies like Lyft, Uber, Tesla, or even Amazon—companies that promise tremendous growth, yet struggle to show consistent profits, or profits at all. We can view it negatively, as a form of crony capitalism, where otherwise inefficient business models are supported and provided seemingly endless life-support via capital markets in exchange for, what may turn out to be, a mythical future payoff. Amazon, for example, plays in the same arena as Walmart, yet Wall Street demands a lot more in the way of earnings from Walmart than it does from Amazon. Investors buy Amazon for the growth, yet Walmart for the stable business model. This allows Amazon to continue to invest billions back into its business where other companies are expected to return capital back to the investors via dividend payments. This, perhaps, unfairly tilts the competitive balance in Amazon’s favor.
But maybe the view is looking at the situation upside down. Maybe this is exactly what capitalism is supposed to do—efficiently allocate capital into the hands of the people who best drive progress and innovation. Maybe Lyft is one of those companies, it’s not for me to say, that is for the market to decide. What does seem clear is that the United States, in the last 20 years, has pulled far ahead of Europe economically and as a consequence, socially. The creation of companies like Lyft, Uber, Tesla and Amazon are almost inconceivable in Europe. The American investor, perhaps due to our capitalistic nature, is more willing to put money behind innovative ideas than European investors. The access to capital allows for opportunity and creates a willingness to try new things.
Not all of these investments pan out. For every Amazon there are multitudes of Pets.com. But the free market determines the winners and losers efficiently, whereas government-directed investment selects the winners and losers inefficiently and provides greater risk of influence peddling, bribery, and kick-backs. Capitalism can create a feeling of instability, because progress is movement, movement feels like risk, and the spoils of progress are distributed, unequally, to those who embrace risk. I disagree with those in the progressive movement because I believe that progress is the natural output of capitalism and absolutely inconceivable under socialism. That progress happens sometimes quickly and sometimes slowly, but it will always materialize if we don’t muck it up.
Thanks for reading,
Zach and Dave
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