Pinterest IPO, another tech unicorn trying its luck

• IPO looking to move past the lacklustre performance of Lyft
• Conservative approach for the IPO pricing
• Low-key approach to growth limiting losses for the unicorn

 

2019 is poised to be the year of unicorns. There are a host of tech start-ups, which have either taken steps towards going public (Lyft, Uber, etc.) or are rumoured to gear up for an IPO in the latter half of the year. Lyft started the trend (refer to our earlier blog on the topic ‘Lyft’s IPO, analysis and implications’). However, a lacklustre response from its IPO (trading below 17% of the offering price since its debut last month) poses a challenge for other unicorns looking to go public.

The latest in the line-up is Pinterest, an image-sharing (images and videos communicate concepts better than words) and idea-inspiring (in ways that mirrors using magazines or catalogues) social media unicorn, which allow its users to save ideas for clothes, décor, recipes, etc., while connecting them to the sellers of these products (advertisers) in an engaging and interactive way. The emphasis here is to provide curated content to suit each individuals’ need, thus, providing an enhanced user experience. It combines the utility of social media with e-commerce as the company likes to call itself ‘a productivity tool for planning your dreams’. People actively seek relevant commercial content on the platform and advertisers are increasingly providing for the same. The company reaches ~265 million monthly active users on its platform, two-thirds of which are women.

Although, the company witnessed an exponential growth in the active users in the international market, however, the major revenue driver was the home market (US), which saw the Average Revenue per User (ARPU) growing exponentially in the region. Moreover, 8 out of 10 mothers (who are primary decision makers for buying household products and services) are on the platform along with half of the millennials in the US.

Looking at the outcome of Lyft’s IPO, Pinterest had initially taken a conservative approach in pricing its IPO, with an anticipated price band of $15 to $17 per share, valuing the company at $11.3 billion (below its latest private funding valuation of $12.3 billion in 2017). Evidently, valuation excesses exist in the private market owing to an unprecedented inflow of capital as compared to more rationale public markets. Further, as can be seen below ‘EV to Sales Ratio’ for the tech players declined over the period after they went public, although the revenue increased over the period, indicating that they could not command higher price multiples as commanded earlier.

However, investors appear to be showing an appetite for the social media company despite the challenges faced by Lyft (since it became the first consumer tech IPO of 2019) and Pinterest’s IPO was priced (above its anticipated price band) at $19 per share (raising about $1.4 billion at ~$12.7 billion valuations). Many investors driving the frenzy are interested in listing gains, which has been over 15.7% for IPOs in 2018 (Source: Renaissance Capital).

The pricing of the IPO for Lyft and Pinterest reflects a key difference in their valuation expectations. Lyft sought a valuation of $24.3 billion, significantly higher than its latest private funding valuation of $15 billion, even while it lost $911 million in 2018. In comparison, Pinterest only lost $63 million in 2018. Thus, the conservative approach followed by Pinterest was in-line with the long-term interest of both the investors and the company.

Additionally, the company has taken a low-key approach, rejecting the typical formula adopted by unicorns to move fast, break stuff and achieve growth at any cost. This has limited the loss for the company vis-à-vis other unicorns while achieving steady growth in the past two years.

The company has carved a niche for itself. According to a PricewaterhouseCoopers study around 38% of Pinterest users’ holiday shopping was influenced by the network.

The retail industry is on the brink of disruption due to the inception of the e-commerce and digital shopping and this is further expected to accelerate in the coming years on the back of physical retailers shifting to online medium for sales. This has been further aggravated by increasing use of smartphones globally.

Hence, with a host of new players (Tradesy that connects women's closets, Tophatter; an online marketplace for 90-second auctions, etc.) as well as incumbent players investing heavily in the online media (Instagram is looking to start a separate shopping app), the challenge for Pinterest will be to retain and increase the user base in the near future. Although, the increased market size (from the disruptions) will come in handy for the company to increase the user base. Technology will play a pivotal role with the heightened use of AI (Artificial Intelligence) to shape the future of shopping.

In conclusion, it can be said that investors have an appetite for tech IPOs and are increasingly looking to invest in the same. This is evident from the response received by Pinterest’s IPO, even on the back of a lacklustre performance by Lyft’s IPO. Along with the low cash burn of Pinterest, the company is slowly inching towards profitability, which should give confidence to its investors (vis-à-vis much higher cash burn for Lyft). The IPO is important from the point of view of other tech companies (like Uber) looking to go public this year, which are keenly watching and hoping that the fate of this stock is different from the earlier ones so that investor confidence is built. Only time will tell what the future holds for this stock, however, the fundamentals seem to be on an ameliorating note and investors are keen to be a part of this journey.