Pinterest AIMS LOW at $1.5B in IPO

It looks like Pinterest might be worth less than investors who bought shares two years ago might have hoped. The tech company, which plans to go public this year, announced in a regulatory filing earlier this week it will sell about 75 million shares somewhere between $15 and $17 each. This would put the value of the company around $9 billion on the high end, billions below the estimated $12 billion value estimated after shares were sold to investors two years ago[1].

The IPO could raise about $1.5 billion for the company, which has struggled along with investors to determine just how to value itself. Pinterest claims it has more than 250 million actively monthly users, an excess of 2 billion monthly searches, and revenue for 2018 of more than $750 million. Although that is 60 percent higher than revenues from 2017, it still represents a loss of $63 million in 2018 and $130 million in 2017.

What Is Pinterest?

Pinterest, which will list as PINS on the New York Stock Exchange, has long been adamant that it is not a social media site. The company instead encourages users to “pin” images that interest them on virtual bulletin boards for reference later. Because it does not encourage interactions between users other than viewing of those pins, the company has avoided privacy issues that have affected other social networks, like Facebook, that encourage interaction between users. Pinterest’s revenue comes from advertising and permits businesses to pay to advertise pins in users’ feeds.

What the Low Valuation Means for Early Investors

While Pinterest has a lot going for it – it has been working on developing an artificial intelligence search that enables users to upload photos they have taken of various items of interest in order to find similar products on the website – the relatively low valuation the IPO stock price creates is putting some investors underwater. While the founders of the company will likely emerge as millionaires from the IPO process, Goldman Sachs, Kleiner Perkins, The Vanguard Group, and John Hancock Investments could see a nearly 26 percent drop in the value of the shares they purchased in the Series G and Series H funding rounds.

Vanguard, for example, which reports it holds about 1.7 million shares of Pinterest, bought shares valued at $37 million in the Series G round. Today, those shares are worth about $27.5 million. Critics of how tech companies are valued in today’s markets say this type of loss for early investors indicates simply that there is too much enthusiasm for tech products that most investors active in the private market do not understand particularly well. “The proposed pricing of the Pinterest IPO below its private valuation is further evidence that valuation excesses exist in the private market thanks to an unprecedented inflow of capital compared to the more rational public markets,” said Renaissance Capital principal Kathleen Smith[2].

The four early buyers will have something valuable at the end of the IPO regardless of the value of their shares: voting rights. Pre-IPO stocks will convert to advantageous voting ratios, giving each share a 20:1 voting ratio compared to shares purchased during the IPO. Goldman Sachs will also have an advantage because it is one of three lead underwriters for the IPO, meaning it will receive fees in the amount of 4-7 percent of the gross proceeds. Of course, with such affordable share values, the IPO could also “pop,” as did many tech IPOs in 2018. In fact, last year, IPOs rose 15.7 percent during their first day of trading, Renaissance Capital reported.

Tell us what you think:

  • Are tech IPOs ever a good time to buy?
  • Do you think there is too much perceived value in tech companies even when they are losing money?
  • Are you planning to buy shares in Pinterest?

Thank you for reading the Bryan Ellis Investing Letter!

Your comments and questions are welcomed below.

 

 

 

—-

[1] https://apnews.com/dbc901513abc465bb94cdbf5db82908c

[2] http://fortune.com/2019/04/09/pinterest-stock-price-ipo-investors-goldman-vanguard/

Leave a Reply