When the Pinterest IPO debuted in April of 2019, it soared 42.1% from its opening of $19 a share. Unfortunately, with the Covid-19 crisis, Pinterest stock has seen a dramatic dip from its debut last year. But that doesn’t mean it’s not worth taking a look at…
The Covid-19 pandemic has curbed the growth of Pinterest stock and has made traders wary of investing. Considering Pinterest’s reliance on advertising revenue, and the sudden drop in ad spending, Pinterest’s 2020 goals are unlikely to be met.
So, why should you still consider Pinterest stock?
Because people are using searching and pinning at record highs. Millions of people staying home in quarantine are turning to the pages of Pinterest to get inspiration for cooking, crafts, home schooling, gardening, and many more at-home activities.
With the surge in Pinterest searches, and the potential for lockdowns to continue into the summer months, Pinterest could continue to see long-term, beneficial growth, making Pinterest stock a worthwhile buy.
That’s why it may be a long-term opportunity to keep your eye on as a high-quality growth stock.
Pinterest Stock 101
Founded back in 2010, Pinterest is a social media site where users share and post images.
While that sounds eerily similar to Instagram, there are a few key differences. Instagram is a platform to share your life through images, captions, stories, and live feeds with select groups of followers or the public. Pinterest focuses on user interests, giving them a virtual “pinboard” to organize content they find on social media, blogs, or even straight from Pinterest.
Pinterest users are known as "pinners," and once they create an account, they answer a series of questions to help gauge the type of images they'd like to see. Then, users are provided with what appears to be an endless supply of images related to their interests and arranged like tiles on their screen.
If a pinner likes a picture, they'll "pin" it to one of their boards for reference later.
The website is more or less like a virtual scrapbook and social media platform shoved into a blender. Similar to other social platforms, pinners can add hashtags to find content, or be found, but without character limits, and the likely extinct "pokes."
Some of the commonly searched and shared images are around things like fashion, architecture, food, and home decor. But with the shelter-in-place orders, searches have shifted towards board games, at-home workouts, self-care, and education.
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It's a simple enough website that's easy to navigate and genuinely offers users useful information. Let's say you're into cooking and want to find new recipes. All you need to do is look up recipes, and you'll be bombarded with an endless supply of ingredients and measurements needed for just about anything you can imagine.
This can be applied to a variety of other interests, too. If you're looking for fashion tips and examples, you'll find more than enough images to help. If you're trying to decorate or paint a room, Pinterest has your back. The examples could go on forever.
On top of that, Pinterest is completely free. But to access the site, you need to have an account to get the ball rolling. Fortunately, Pinterest makes the entire process fairly easy by integrating Facebook and Google logins.
While Pinterest is useful, fun, and easy to navigate, it's up against some big competition. Aside from the three we listed we listed already, there are more niche ones, like Houzz, Tastemade, and Allrecipes. But Pinterest is the third-largest social network in the United States.
And Pinterest's 335 million users sounds massive – until you compare that number to Facebook's 2.5 billion.
Luckily for Pinterest, the company hasn't had to deal with any scandals – especially like Facebook's data breach back in 2017.
Beyond that, Pinterest's active user base continues to grow with 8% year-over-year growth, ahead of what many analysts predicted. And it’s certainly grown since stay-at-home orders have been issued across the US.
Prior to Pinterest's IPO, the company was valued at $12 billion after receiving $1.5 billion in funds back in 2017. Post-IPO, the company is valued at around $10 billion. The firm's shareholders include Andreessen Horowitz, Fidelity Investments, Valiant Capital Management, FirstMark Capital, and Bessemer Venture Partners.
While Pinterest stock prices are lower, the unique market situation could position Pinterest as a bargain worth investing in.
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Should You Buy Pinterest Stock?
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Pinterest's user base reportedly accounts for 43% of people on the Internet in the United States. The company also says its user base overwhelmingly consists of moms between the ages of 18 and 64 (at least 80%). Although, with the Covid-19 pandemic, users have increased and the potential for new types of users may have shifted.
While those figures offer some unique information, it doesn't really dive into the important numbers: the company's financials.
Yes, Pinterest is projected to make $1.3 billion in 2020. However, earnings are expected to come in at a $0.07 loss per share. So, while institutional investors may be able to profit on companies operating on negative equity, this story is a little different for retail investors.
Sure, Pinterest isn't doing as bad as Lyft's $900 million operating losses, but it's still running on negative equity.
And while the site is fun and unique, it doesn't equate to profitability. It also should not be a deciding factor for your investment. Beyond that, you have to recall that it's competing with the biggest social media giants in existence.
Plus, Pinterest outlined a few more issues with the platform...
- In Q2 2018, Pinterest user growth saw a big slowdown after Facebook changed its login authentication - which made logging in using Facebook difficult for a period of time. If Facebook or Google were to have any other login problems, Pinterest accounts would likely be lost.
- Pinterest has always had a hard time breaking into other demographics, with mothers taking up 80% of its total user base.
- While Pinterest has been on top of complying to regulations, both the United States and EU are hunkering down on legislation that will flag content if it doesn't meet compliance standards.
But there's more...
Pinterest offers a dual-class stock. This means the leadership all the way down to the employees get 20 votes per share. All the while, retail investors will have one vote per share.
So, you better like who's in charge over at Pinterest and where they're taking the company - because you'll just be along for the ride.
Beyond that, we've already seen just how risky IPOs can be, like that of Lyft's IPO back in March of 2019. The company was overvalued and oversubscribed. But it also faced two class-action lawsuits by investors accusing Lyft of overstating its market value by 39% at its IPO.
In fact, Lyft stock dropped significantly after its IPO - outlining just how volatile prices can be. Banks had valued Lyft shares at $62 to $68 per share. But because of the overwhelming amount of interest, shares sold for $72 once the company went public.
By the time retail investors were able to buy shares, the prices had skyrocketed to a little over $88. This means anyone who purchased it at $88 per share was looking at significant losses later.
Lyft's monumental flop should be a warning to any and all investors who have sipped on a little too much of Wall Street's Kool-Aid. Many of 2019's tech IPOs are operated with a similar financial situation as Lyft. In other words, they are losing money and facing fierce competition.
While there was a lot of hype for the Pinterest IPO last year, the landscape has certainly changed. Wishful thinking from institutional investors at Wall Street has shifted and doesn’t always apply to a retail investor. For retail investors looking to capitalize in the bear market, be sure to keep an eye on the balance sheet.
So, Money Morning does not recommend investing in Pinterest stock for now.
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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.