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Lyft: Is Warren Buffett’s Warning Turning Out to Be True?

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Lyft stock has tanked

On the first trading day of the second quarter, Lyft (LYFT) stock fell below its IPO price of $72.00 to a daily low of $69.17. According to Thomson Reuters, Guggenheim, which started covering the stock earlier today, has given it a “neutral” rating.

Most analysts surveyed by Reuters—or three out of five—have recommended “holds” on Lyft stock, while the remaining two have given it “buys.” The buy-to-hold rating ratio could be hurting investors’ sentiments.

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Buffett’s warnings

On March 28, while talking with CNBC at an event organized by The Gatehouse in Texas, legendary investor Warren Buffett responded to a question about Lyft’s IPO by saying, “I think buying new offerings during hot periods in the market…I don’t think it’s anything the average person should think about at all.”

In discussing Lyft’s IPO, which was valued at $24.3 billion, Buffett said, “I certainly wouldn’t buy a business for 25 billion,” referring to Lyft’s expected market cap. He added, “With all the things you can buy for 25 billion in this world, that you would pick a business that really has to be earning two and a half or three billion pretax in five years to even be on the same radar screen as things you can buy right now…I have never been a big buyer [of IPOs].”

It’s too soon to pass judgment on whether or not Buffett’s views on Lyft’s IPO are turning out to be true, as the stock just started trading on the NASDAQ (QQQ) on March 29. However, Buffett’s point makes a certain amount of sense if investors consider the opportunity cost of investing their hard-earned money into a company such as Lyft, which is burning cash quickly without any near-term profitability in sight.

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