Why Lyft Shares Are Up 14% From the IPO, But Down 7% From the Peak

What happened

Shares of newly public company Lyft (NASDAQ: LYFT) were up 13.6% at 2:40 p.m. EDT on Friday, the inaugural day of trading for the stock on public markets. The price of $81.80 represented a nearly $10 premium to the $72 listing the company set earlier this week.

So what

While the current trading price represents a solid gain from the IPO price -- which was actually increased from the initial range of $68 to $71 in its S-1 filing -- Lyft's stock price is actually down from the intra-day high:

Lyft shares opened trading at nearly $88 under very heavy demand from early buyers, but the stock price has fallen as more afternoon trading activity has been driven by sellers.

Frankly, this is par for the course for any big IPO -- that is to say, unpredictable. IPO participants who sold shares when trading opened realized a big, quick profit, while the investors who bought shares in the first few minutes of trading are now sitting on a paper loss.

Now what

Not sure what to do now? There are certainly plenty of opinions on Lyft out there, including reasons to avoid it (such as its growing mountain of debt and substantial cash burn), reasons to buy it (such as its incredible growth prospects and disruptive potential), and reasons to wait and watch.

Here's what it really boils down to: Lyft's stock is set to be very, very volatile, and likely for multiple years. For instance, its bigger competitor Uber is expected to have its IPO later this year, and it's hard to know what effect that will have on Lyft's stock in the short term. Additionally, the company's business model and growth strategy require substantial investment, and that means Lyft is likely to remain cash-flow negative and regularly report wide net losses for some time to come.

And when a company is going to spend more cash than it earns for an extended period of time -- something that the IPO proceeds are intended to fund -- valuing the business requires substantial speculation and will result in a far more volatile stock than the average.

Yet at the same time, you have a company that's still run by founders who will maintain control of the company, with a laser focus. The evidence is overwhelming that these are the start-ups most likely to become market-beating investments.

Should you buy Lyft? It comes down to your willingness -- or ability -- to stomach the volatility and potential permanent losses if Lyft fails to meet investors' expectations. I'm on team "wait and watch" for now. It's not because I expect the stock to fall, but because I want a better idea of how Lyft performs under the quarter-to-quarter scrutiny of Wall Street -- as well as its operations and management's ability to allocate capital -- before I consider investing.

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Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.