Why Pinterest Is Playing It Super-Conservative on Its IPO Price Range

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Image-sharing, idea-inspiring social media company Pinterest is the next big internet player heading toward an initial public offering, but for some reason, it's seeing itself as less valuable now than during its last private funding round. That round valued it at around $12 billion. If the current share price range of $15 to $17 prevails, the potential value when it debuts will top out at around $11 billion.

In this segment from Market Foolery, host Chris Hill and Fool.com contributor Dan Kline try to gauge what Pinterest's management team is thinking, review their strategy on advertising, and consider the areas where they really do need to play it safe. The pair also talk about whether its stock looks like an early buy.

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This video was recorded on April 8, 2019.

Chris Hill: Let's move on to Pinterest. Pinterest is next in line for the anticipated IPOs. We don't have a date yet. They filed their S-1 a couple of weeks ago. Now they've come out with their price range. They've set the range at $15 to $17 a share. On the face of it, that seems reasonable.

Dan Kline: It's super conservative.

Hill: Let's talk about that. It's conservative to the point where, the last time we saw numbers regarding what Pinterest is worth on the private markets, if they hit this range, they're going to be valued in the public markets up to $9 billion for the company. That's lower than what we saw in the most recent valuation on the private market.

Kline: It's a little bit lower. I believe the number is actually $11 billion, that this would value them at. The last round was at $12 billion. You don't usually see companies coming out and telling their last round of investors, "You're going to take a little bit of a haircut here. This is not great." Honestly, it seems odd to me, because this is a really great company. I had not thought a lot about Pinterest. I am not, you are not, the target person for Pinterest. It's two-thirds female. About eight in 10 mothers in the U.S. are on Pinterest. But they don't have a lot of debt. The only thing you could argue about Pinterest is they've been so conservative with spending capital, that that does constrain the massive growth. But their advertising numbers have gone up 60% in the past year. Even in the last quarter, they added 41 million monthly active users from a base of 250 [million] to 291 [million]. That's stunning!

Hill: Do you think, on any level, what we saw play out with the Lyft IPO factored into how Pinterest set their price range?

Kline: I think when you're a company that's very careful with cash, perception matters. Are they going to cost themselves a little bit of money by pricing low? They are. But they also will put it out there at a place where they're more likely to get that first wave of stories about the IPO being a mild success, instead of what you're having with Lyft. You would think Lyft went to $2. Instead of Lyft being down 10%, a couple of the dollars in the real world, the stories on it make it feel like it's been a disastrous IPO, and Uber should just not IPO. [laughs]

Hill: When you think about, as you said, how conservative Pinterest has been managing their money, maybe this price range makes more sense, particularly if the attitude they're taking is, "Look, we know what our numbers are. We know what our strengths are. By the way, we know what our growth has been. We see the projections in the digital advertising market, and, look, they're not Google. They're not Facebook, and they're not Amazon." We talked recently on Motley Fool Money about Amazon building up their digital ad business. But Pinterest has their niche, they're doing it well. And if they look at that growing digital ad market and say to themselves, "We don't need to get the biggest slice of pie, we just need to get our slice of the pie," they're going to be fine.

Kline: And the ad market, as you said, it's growing. They have a strategy to get more advertisers. They're underindexed on small businesses. That's an area where Facebook does really well. So they can organically take the audience they already have -- they actually have to be most protective of their community. They have a niche. It's closer to LinkedIn than it is to Facebook. So when you look and say they're speaking to women, they're speaking to people, they have to make sure that their advertising doesn't overwhelm their content. It's great -- if you're on Pinterest and you search for a recipe and you get the recipe, you don't care if it's from your next-door neighbor or from someone who has a vested interest in selling you a particular brand of flour, as long as it's a good recipe. It's really about protecting the content experience. They have an unassailable audience. Facebook can't easily take this, or Twitter, or Amazon, as long as they put the customer first, which we've seen is something Facebook did not do.

Hill: Right. And let's be clear, when we're talking about flour, there's only one choice. It's King Arthur Flour.

Kline: [laughs] I couldn't have named a brand of flour if we had talked for an hour.

Hill: Ohh, no, it's King Arthur! In terms of IPOs, is this something that you look at and you think, "I want to get in, if not the opening day, as close to the opening day as possible"? Or are IPOs something you say, "I don't care how excited I am by the story. I'm waiting three months to see how they do"?

Kline: I hadn't given a lot of thought to Pinterest as a company before you brought up talking about it on the show. And I'm actually super impressed. Normally, I agree. IPOs are about hype. They're much more about what happens to a stock the day after earnings are reported and someone reads the first line of the earnings report and the stock goes down 10%. But I look at the fundamentals of this company, and I can't disagree. When you read the risk section -- you've read those, they're always preposterous. It's like, "What if all of our executives are eaten by bears? The internet could go away." But, the actual risks to their business are fairly minimal. When you're this conservative with capital -- they only lost $39 million last year. Do you know how much Lyft lost?

Hill: More.

Kline: Over $1 billion. $800 million or some stunning number. I think, Uber, it's $1.8 billion in the last year they lost. So, this is a company that has been growing and slowly cutting losses. Let's say there is a zig in their business. Something changes about people's trust in online advertising. They'll have a down quarter and figure it out. It's kind of like the Costco model, but brought across to the internet. I know it's a weird thing, but, Costco goes a very slow and steady. They didn't jump into digital. They looked to see what everyone needed and then they gave their customers just enough. That is how Pinterest is operating. I like that a lot better than the "we make money when we grow 50 times" model.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN. Daniel B. Kline owns shares of FB. The Motley Fool owns shares of GOOGL, GOOG, AMZN, FB, and TWTR. The Motley Fool has a disclosure policy.