Valuations Are Still Too High For A Pinterest IPO

  • Social platform Pinterest is a popular investment in the private market due to its impressive growth potential.
  • Pinterest is slowly monetizing the hype and buzz around it, but valuations are steep.
  • A confidential filing followed by a price discount and revised revenues should pave the way for an IPO in late 2016.

The social scrapbooking site Pinterest is one of the hottest social platforms that is still private. As shown in the chart below, the list of most popular social platforms is dominated by Facebook (NASDAQ:FB), which also owns Instagram, WhatsApp, and FB Messenger, and Tencent (OTC:TCEHY), which owns QQ, QZone, and WeChat. The rest of the social platforms are either independent or owned by other tech giants like Twitter (NYSE:TWTR), Microsoft (NASDAQ:MSFT), Baidu (NASDAQ:BIDU), or Yahoo (NASDAQ:YHOO)). Three of these independent platforms attract the most attention from investors: Line, Snapchat, and Pinterest. The Asian app Line recently decided to delay its IPO, and Snapchat was devalued lately by Fidelity and will probably not go public soon. That leaves Pinterest as the last major independent social platform to make it to the list of expected IPOs this year.

Pinterest_Chart 4_021116

Pinterest is a unique social platform that allows users to create online scrapbooks by pinning images, links, and other visual content to user-defined boards. Pinterest’s users can search the site for ideas and inspiration from other users’ boards. This makes Pinterest a secondary search site for many users. A simple interface and unique social capabilities have made Pinterest a favorite target platform for advertisers.

Pinterest accelerated its monetization efforts over the last two years when it first launched the promoted pins program in late 2014. The program generated less than $25M for the enterprise. Pinterest charges advertisers in the standard pay-per-click model for its promoted pins, which drive most of the company’s revenues. In mid-2015, Pinterest introduced the buyable pins program. This program allows users to purchase products directly from pins on the website using an Apple Pay account or a credit card. Pinterest is not charging consumers a transaction fee — though Apple Pay and the credit card companies do — but the social platform charges advertisers to promote and display buyable pins. The fact that items pinned to users’ boards are not only visible to them but searchable by all Pinterest users is appealing to advertisers looking to expand their social media advertising efforts beyond Facebook, Twitter, and Google. The two revenue streams account for most of the company’s revenues, which makes Pinterest a significant online advertising platform. In a document leaked to Tech Crunch's VC firm, Andreessen Horowitz forecasts that Pinterest will grow its revenues 120X from $25M in 2014 to $2.8B in 2018.

These two online advertising programs make Pinterest an attractive, growing, independent social platform for investors who poured an additional $550M last year at a whopping valuation of $11B led by Andreessen Horowitz and Bessemer Venture Partners. In its latest series of funding, Pinterest’s valuation more than doubled from $5B in its series F that took place in May 2015 and enabled it to enter the prestigious club of unicorns valued at $10B or more, like SpaceX, Didi Kuaidi, Airbnb, Palantir, and Uber.

As shown in the chart below, Pinterest has successfully raised $1.3B since 2010 in 8 equity funding rounds. In the last funding round, Pinterest was valued at $11B, which reflects an unrealistic valuation at a P/S ratio of 60, assuming $169M TTM revenues. Pinterest would not go public with such a high and unattractive valuation. Therefore, the company will need to discount its share price significantly to become an attractive investment with a reasonable valuation.

Pinterest_Chart 5_021116

Pinterest could significantly discount its shares price while guaranteeing its investors a 20% return on the series G price, as many other startups include in their prospectus. However, in Pinterest’s case, it seems that the discount might be too big to absorb. With the current unrest in the market and the significant discount, Pinterest, due to its share price, will probably have to halt its IPO, either till the IPO market gets back on track and a bull market rally is underway, or until it generates significantly higher amounts of revenues that reflect a better P/S ratio.

The likely scenario, as I see it right now, is that Pinterest will confidentially file for IPO during the first half of 2016, targeting to go public towards the end of the year. In this case, the company will have an indication of a higher revenue level than expected in 2016. I believe the company will go public this year while discounting its share price and adding an embedded protection for series G investors. In case the projection for 2016 revenues is not that impressive, the company will push the IPO to early 2017. As the hype and buzz around Pinterest remain, investors should keep a close eye on this IPO in 2016.

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