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 share prices, the company would have a valuation of $10 billion to $11.3 billion. That's notably lower than Pinterest's valuation in its last round of fundraising back in 2017, when it was valued at $12.3 billion.
The idea that Pinterest has lost value over the past of couple years may scare off would-be investors. Pinterest has added more than 100 million monthly active users since June 2017 -- 52 million in the past 12 months. Meanwhile, average revenue per user grew from $0.49 in the first quarter of 2017 to about $0.72 last quarter. So, it might be a surprise to some that Pinterest isn't garnering a better valuation today, especially considering how "hot" the IPO market is.
The down round IPO
Pinterest wouldn't be the first company to make its public market debut at a valuation lower than its last round of private equity funding.
Square (NYSE: SQ) made its market debut at a valuation of about two-thirds that of its last private equity round. Square raised $150 million at a $6 billion valuation in October 2014. It debuted on the New York Stock Exchange at $9 per share a bit more than a year later, valuing the company at just $4 billion.
Square got off to a slow start as a publicly traded company, but excellent execution by its management has enabled the stock to climb to a $31 billion market cap today.
Other "down round IPOs" from around the same time haven't gone as well. Box (NYSE: BOX), for example, made its public debut at a valuation of about $1.7 billion, below its previous $2.3 billion valuation in its last private funding round about six months previously. A year later, Box was worth just two-thirds of its IPO valuation. Shares have since bounced back, but still sit below their price after the first day of public trading.
There are countless other examples in recent history of companies going public at valuations lower than their previous private market valuations. Some have performed like Square, and others more like Box. But the valuation at their market debut doesn't seem to be highly correlated with a stock's success.
A tale of two markets
The private equity market is quite a different beast than public equity. While public markets have more buyers and more money in them, the private equity market has seen a dramatic rise in the past few years as investors search for alternative options in a low-yield environment. Private equity tends to outperform the public market in the long run.
The rise in funds earmarked for private equity has led to many companies staying private longer, even as their valuations surpass $1 billion or even $10 billion (reaching "deca-corn" status). And the amount of money available in private equity may lead to some less rational valuations.
It's no surprise, then, that a number of companies have been making their public market debuts at valuations lower than they could garner in private equity markets just a few months earlier. There are a lot more options for public equity investors, making pricing more rational.
What potential Pinterest investors should focus on
Investors interested in the Pinterest IPO should consider management's execution and its ability to continue executing into the future. As noted at the top of the article, the company is showing healthy user growth and revenue growth over the past couple of years, and Pinterest looks well positioned to continue capturing the time and attention of a certain niche of users.
Meanwhile, investors should also look at competition from other social media and search companies. If they're able to develop products that compete for Pinterest's core audience or perform a function at a higher level than Pinterest's search and discovery platform, it could curtail the growth of the company going forward no matter how well management can execute.
Investors shouldn't put too much weight into Pinterest's valuation at its IPO compared with its private equity valuation in 2017. It doesn't say much about investors' expectations for the company's future. Investors need to look at the offer they're presented with and determine whether Pinterest's $10 billion or $11 billion valuation makes sense to them moving forward.
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