Is Pinterest’s lower IPO valuation a bad sign?

Pinterest has set a price range for its IPO: $ 15 to $ 17 per share. At those stock prices, the company would have a valuation of $ 10 billion to $ 11.3 billion. That’s significantly lower than Pinterest’s valuation when it last fundraised in 2017, when it was valued at $ 12.3 billion.

The idea that Pinterest has lost value over the past two years may scare off potential investors. Pinterest has added over 100 million monthly active users since June 2017, or 52 million in the past 12 months. Meanwhile, the average revenue per user fell from $ 0.49 in the first quarter of 2017 to around $ 0.72 in the last quarter. So, some might be surprised that Pinterest doesn’t get a better valuation today, especially given the intensity of the IPO market.

Image source: Pinterest

The IPO down

Pinterest wouldn’t be the first company to debut in the public market at a lower valuation than its last round of private equity funding.

Square (NYSE: SQ) debuted in the market with a valuation of around two-thirds of his last tour de table. Square raised $ 150 million at a valuation of $ 6 billion in October 2014. It debuted on the New York Stock Exchange at $ 9 a share just over a year later, valuing the company at just $ 4 billion.

Square got off to a slow start as a publicly traded company, but the excellent execution of its management has seen the stock soar to a market cap of $ 31 billion today.

SQ Market Cap ChartMarket capitalization SQ given by YCharts

Other “IPOs” around the same time did not go so well. Box (NYSE: BOX), for example, debuted on the stock exchange with a valuation of about $ 1.7 billion, lower than its previous valuation of $ 2.3 billion in its last private funding round about six months earlier. A year later, Box was only worth two-thirds of its valuation when it went public. Stocks have since rebounded, but are still below price after the first trading day.

There are countless other examples in recent history of companies going public at lower valuations than their previous valuations in the private market. Some have played like Square, and others more like Box. But valuation early on in the market does not appear to be strongly correlated with a stock’s success.

A story of two markets

The private equity market is quite a different beast than the private equity market. As the public markets have more buyers and more money, the private equity market has seen a dramatic increase in recent years as investors seek alternative options in a low yielding environment. Private equity tends to outperform the public market over the long term.

The increase in funds earmarked for private equity has led many companies to remain private longer, even as their valuations exceed 1 billion or even 10 billion dollars (reaching the status of “deca-corn”). And the amount of money available in private equity can lead to less rational valuations.

It’s no surprise, then, that a number of companies debuted in the public markets at lower valuations than they could get in the private equity markets a few months earlier. There are many more options for public equity investors, which makes pricing more rational.

What potential Pinterest investors should focus on

Investors interested in the Pinterest IPO should consider management execution and its ability to continue execution going forward. As noted at the top of the article, the company has shown healthy user and revenue growth over the past two years, and Pinterest appears well positioned to continue to capture the time and attention of a certain niche of users. .

In the meantime, investors should also consider competetion other social media and search companies. If they are able to develop products that compete for Pinterest’s primary audience or that perform a function above the Pinterest search and discovery platform, it could hold back the growth of the business. going forward, regardless of the quality of management execution.

Investors shouldn’t place too much weight on Pinterest’s valuation when it IPO versus its private equity valuation in 2017. That doesn’t say much about investor expectations for the future of the company. business. Investors need to review the offer presented to them and determine whether Pinterest’s $ 10 billion or $ 11 billion valuation makes sense to them going forward.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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