Much like Lyft and Uber, Pinterest is one of the latest IPO "unicorns" garnering a lot of excitement. And while it shows promise, we recommend not buying Pinterest stock once the company goes public.
There are simply too many red flags, and we've counted eight of them before the firm has even gone public.
Back in February, Pinterest filed for an IPO with Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), and Allen & Co. The Pinterest stock will be listed on the New York Stock Exchange under the ticker "PINS" with the expectation that it will go public in April.
Before we dive into those details, here's how Pinterest works...
A Primer for the Pinterest Stock Investor
Pinterest is a social media platform in which images are recommended to users based on preferences. The users, known as "pinners," create their own image libraries related to their interests called "boards."
It's often described as an online scrapbook with a little social media thrown in to spice things up. Instead of sharing your entire personal life in 280 characters or less, users share and save pictures that involve things like recipes, cooking, fashion, home improvement, and art.
For its users, it's a way to express their identities online.
While the concept is unique and slightly addictive, Pinterest directly competes with social media giants like Facebook Inc. (NASDAQ: FB), which has 2.3 billion users in comparison to Pinterest's 265 million.
The company is also operating in a highly saturated market. Beyond just Facebook, there's Twitter, Instagram, Google, Houzz, Allrecipes, and Tastemade.
Fortunately for Pinterest, it isn't plagued with privacy scandals like Facebook has been since 2018.
But similarly to Snap Inc. (NYSE: SNAP), Pinterest is a target for Facebook. And Facebook will do just about anything to smother the competition. Just look at the addition of Instagram stories when Snap became popular.
Beyond that, with Uber and Lyft operating on $800 million to $900 million in losses, analysts are turning a little bearish toward tech IPOs flooding the market in 2019.
However, Pinterest has Wall Street buzzing with excitement.
Last year, Pinterest made $756 million in revenue. That's 60% higher than 2017's $473 million.
Between now and 2016, Pinterest's active user base grew 22%.
Pinterest's current estimated value is $12 billion. Its filing highlighted some of its biggest shareholders, like Bessemer Venture Partners, FirstMark Capital, Andreessen Horowitz, Fidelity Investments, and Valiant Capital Management.
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No price range or goal for shares sold have been publicly announced by Pinterest yet.
With Pinterest's revenue growth, user-friendly website, and overall popularity, there's a lot of hype surrounding the IPO.
But there are a few key red flags to look out for before investing into the buzz of Pinterest's IPO...
Should You Buy Pinterest Stock?
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Pinterest has undeniable popularity. The company says its audience accounts for 43% of American Internet users. This includes an overwhelmingly large percentage (80%) of mothers between the ages of 18 and 64.
Sure, that's one of the reasons Wall Street is excited, but Pinterest's S-1 shows the firm isn't profitable.
In 2018, the company made $756 million with a loss of $63 million.
To give some credit, that loss has gone down 54% since 2017's $138 million. It's certainly doing better than the other tech IPOs like Uber and Lyft.
Pinterest is definitely intriguing. It's the type of website that has you addicted before you even realize it.
You sign up with your e-mail, and next thing you know, you're asked a series of questions. It gauges your interests, the type of imagery you'd want to see, and then throws you out into the wilderness to experience Pinterest.
Thousands of pictures are displayed as tiles, and when you click on one, it recommends a variety of other similar images in an endless, dopamine-producing feedback loop.
By the time you decide to stop yourself, an hour or two has already gone by.
That's the type of social media platform Pinterest is. The reason for its popularity is clear as day for anyone that has spent more than a minute on the site.
However, Money Morning cannot recommend investing in Pinterest right now. All of the positives can't outweigh one simple fact: It's operating on negative equity against social media heavyweights Facebook and Alphabet Inc. (NASDAQ: GOOGL).
But Pinterest was also kind enough to outline the risks themselves...
- If Facebook were to change its login authentication again, its user growth would be directly impacted (which has already happened, but no numbers were given).
- Pinterest will have a hard time breaking into non-mom demographics.
- If Facebook or Google were to remove single sign-in or experience an outage, Pinterest accounts could be impossible to recover.
- This would cause a massive decline in growth and engagement.
- Further U.S. and EU regulations may flag Pinterest content after failure to comply.
Those are just a few red flags...
Pinterest's Red Flags Continue to Proudly Wave
As far as social media platforms go, Pinterest is unique. The user-friendly site and its visual nature are more than enough to keep its user base engaged and coming back for more.
The problem is that its revenue is dependent on advertising - a problem all social media platforms face.
Beyond this, Pinterest plans to issue a dual-class stock like the rest of the Silicon Valley IPOs. This means early retail investors will get one vote per share, while founders, directors, top executives, and employees have 20 votes per share.
So, as a retail investor, you'll have zero say in the future of Pinterest. This means you'd better like who's in charge now, because you'll be stuck with them for quite a while.
Whenever these big tech IPOs launch, much of their hype is emotionally charged. And the Pinterest IPO is no different.
We recommend to always wait six months to a year on new IPOs. Check the first two earnings reports, and if they're growing, invest.
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