Along with Lyft and Uber, Pinterest is the latest startup "unicorn" expected to go public over the next few weeks. And while the company has potential, we recommend not investing in the Pinterest IPO.
This company has so many red flags, it's hard to keep them all straight. In fact, we've already counted eight, before Pinterest even goes public.
In February, the company confidentially filed for an IPO with Allen & Company, JPMorgan & Co. (NYSE: JPM), and Goldman Sachs Group Inc. (NYSE: GS). The plan is to list its shares under the symbol "PINS" on the New York Stock Exchange.
Here's a closer look at how the company operates...
Everything You Need to Know About the Pinterest IPO
Pinterest's website provides visual recommendations to "pinners" based on interests and tastes. These are called "pins." So, when a "pinner" saves an image (pin), it's then organized and placed into their collections (board).
Think of it like an online scrapbook mixed with social media. But instead of statuses and character limits, it's more about users sharing and saving images around things like interior decor, cooking, recipes, art, and fashion.
And it's impossible to overlook the popularity of social media. People love having their own profiles, sharing interests, and even photos. For many, it's a way to express their identities online.
However, companies like Facebook Inc. (NASDAQ: FB) remain at the top of the industry (2.3 billion users). And Pinterest is in direct competition with this juggernaut (265 million users).
Luckily for Pinterest, it hasn't dealt with any privacy scandals like Facebook did in 2018.
But much like Snap Inc. (NYSE: SNAP), Pinterest is in Facebook's crosshairs. And Facebook is known for pulling out all of the stops - even copying the competition.
Unfortunately, Lyft's $911 million and Uber's $842 million in losses in 2018 also have analysts skeptical toward the flock of heavy-hitting tech IPOs in 2019.
Still, Pinterest has some analysts in Wall Street hopeful.
In 2018, Pinterest saw $756 million in revenue (up 60% from 2017's $473 million). That's 40% growth in just one year.
Beyond that, Pinterest has grown in its active user count 22% since 2016.
But again, the social media industry is packed with competition. There's also Twitter, Instagram, Google, Houzz (online home improvement), Allrecipes (online recipes), and Tastemade (online cooking content) following closely behind.
As of right now, Pinterest's IPO price range has not been made public. And its goal for shares sold has also not been revealed.
Its current private valuation is estimated at around $12 billion based on total funding of $1.5 billion. And its filing showed the biggest shareholders include FirstMark Capital, Bessemer Venture Partners, Fidelity Investments, Andreessen Horowitz, and Valiant Capital Management.
Pinterest's user popularity, easy-to-use website, and revenue growth have all created solid hype around the IPO.
But there are some red flags to watch out for before buying into the Pinterest IPO buzz...
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These Red Flags Make the Pinterest IPO a Pass... for Now
Pinterest is a very popular social site. They even claim 43% of Internet users in the United States are a part of their audience. That includes a strong demographic of mothers (80%) between the ages of 18 and 64.
And while that's great, Pinterest's S-1 showed the company isn't profitable.
Sure, it made $756 million in 2018. But it's still not making money, with a $63 million loss.
To its credit, that's a 54% decrease from 2017's $138 million. It's definitely not as far gone in negative equity as other big IPOs like Lyft or Uber.
I'd even go so far as to say its website is definitely interesting.
I've used it a handful of times, and I can tell you that it is useful and a little addictive.
Now, I didn't want to sign up, but the only way to access the content I clicked on was to put my email in. I begrudgingly did so and was then asked to check a series of "interests."
Next thing I knew, an hour had gone by. I had pinned 60 some pictures for reference, and if I hadn't forced myself to stop, I could have gone another hour.
Despite some immediate reservations, I could see why it had become so popular. I even enjoyed it more than Instagram.
However, Money Morning cannot recommend buying Pinterest shares (at least for right now) - especially when it's operating at a loss and in direct competition with Internet juggernauts like Facebook and Google.
Pinterest even outlined some of the risks itself...
- Facebook login authentication change negatively impacted Pinterest user growth in the 2018's second quarter (the company has not provided specific numbers).
- It will likely have difficulty breaking out into other demographics.
- If Google or Facebook has an outage or gets rid of single sign-on, it may be impossible to recover user's accounts.
- That may also result in a decline in growth and engagement.
- Despite diligently removing flagged content in line with U.S. and EU regulations, further legislation will hold it accountable for any failures to comply.
And that's just a few of the red flags.
Facts and Patience Are Key for the Pinterest IPO
Pinterest has a cool social site going for it. It's got enough imagery to keep 265 million users occupied on a regular basis, even.
However, its revenue depends on advertising. And its biggest competition operates the same way.
Beyond that, like many Silicon Valley tech startups, Pinterest is planning a dual-class stock. This means employees, directors, top executives, and founders will all have 20 votes per share. While early shareholders like you and me will have one.
This means you'll just be along for the ride. So, you better like the decisions they're making.
These big tech IPOs are all about emotion, and Pinterest is no exception.
But if you've been reading Money Morning, you know it's better to wait six months to a year. Then, check the first two earnings reports. If you see growth in EPS and revenue, then you can consider investing in Pinterest.
However, we have a better investment that you can do instead for big profits.
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About the Author
Daniel Smoot is a Baltimore-based editor who helps everyday investors with stock recommendations and analysis. He regularly writes about initial public offerings, technology, and more. He earned a Bachelor's degree from Towson University.