DJ Pinterest Is Going Public. Here's What You Need to Know. -- Barrons.com

By Andrew Bary

The market for new stocks has lost some of its unicorn fairy dust after a disappointing debut by Lyft. A coming initial public offering could bring back some of the magic -- and it may not be one from Uber Technologies.

It's Pinterest, the operator of a popular bulletin-board website. It has an attractive high-growth business, is close to profitability, and -- most important -- appears willing to price the deal to sell. The talk on Wall Street late last week was that demand was strong for this week's IPO, and the talk looked to be correct, as Pinterest looks set to raise more than $1.4 billion after pricing shares at $19.

That's below a price of more than $21 a share that Pinterest received in a round of financing from Fidelity Investments in 2017. At $19, Pinterest, which will list under the ticker PINS, would be valued at more than $12 billion, based on a fully diluted share count of about 655 million shares.

At a time when unicorns -- private companies valued at more than $1 billion -- feel pressure to price their IPOs aggressively, Pinterest's restraint could pay off.

Lyft (ticker: LYFT) pushed too hard and priced its IPO at $72 a share, above its pricing range. The stock has since fallen to $59 as investors focus on its heavy losses and await the IPO of Uber, its larger and stronger rival.

Uber's reported goal of a $100 billion market value could prove a stretch after its IPO filing became public on Thursday. It showed core revenue flattening in the past few quarters, suggesting that the global ride-hailing opportunity may not be as large as Uber and Lyft fans believe.

Uber's core revenue totaled $2.54 billion in the fourth quarter of 2018, almost exactly the same as its second quarter, amid continued operating losses that totaled $3 billion last year, compared with $4.1 billion in 2017.

Pinterest could be considered expensive by traditional financial measures, and investors are likely to compare it to richly valued internet companies like Twitter (TWTR) and Snap (SNAP). Pinterest is growing rapidly off a low base, with revenue up 60% last year, to $756 million and rising a projected 45% to about $1.1 billion this year.

Pinterest had more than 265 million global users at the end of 2018, including 82 million in the U.S., who compile visual bulletin boards using pinned images on such topics as home renovations, wedding planning, fashion, and cooking. Women make up two-thirds of Pinterest's user base, including 80% of U.S. mothers ages 18 to 64 -- an attractive demographic given the role that women play in household financial decisions. Pinterest writes in its prospectus that half of all U.S. millennials are users.

The company appeals to advertisers, which buy so-called promoted pins that are comparable to sponsored posts on Facebook, because users are often planning to make purchases. Pinterest calls itself "the productivity tool for planning your dreams."

Atlantic Equities analyst James Cordwell began coverage of Pinterest with an Overweight rating and a price target of $23 a share, writing that "the company's unique and broadly appealing proposition, offering consumers the ability to view and collate visual recommendations, will enable ongoing robust user growth." He expects "significant monetization upside, given the higher purchasing intent of the user base" and sees 32% compound annual growth in revenues from 2018 through 2022.

One of Pinterest's biggest opportunities -- and challenges -- is outside the U.S., where it generates just 8% of its revenue.

"Twitter gets almost half of its revenues outside the U.S.," Cordwell tells Barron's. "There is no structural reason that Pinterest can't be as successful as Twitter."

Unlike Lyft, Pinterest is close to profitability on an annual basis and operated in the black in the fourth quarter. The company lost $75 million from operations in 2018 against $911 million for Lyft. Cordwell sees non-GAAP profitability in 2019 when excluding stock-based compensation. Pinterest, like many tech companies, is a generous issuer of restricted stock to employees, compensation that tech investors are often willing to ignore. Cordwell sees GAAP profitability in 2021.

Pinterest will probably be valued based on its revenue. Assuming an IPO price of $16, the company would be valued at eight times projected 2019 sales of $1.1 billion when factoring in its $1.5 billion in cash. Snap is valued at nine times, and Twitter and Facebook (FB), at about seven.

Susquehanna Financial Group analyst Shyam Patil wrote that Snap's valuation "could set the floor for Pinterest."

That would be bullish since Snap is valued more highly than Pinterest. He views Pinterest as a "better business" than Snap with a "much cleaner and visible growth story." While Pinterest competes against Facebook, which is using its Instagram to drive e-commerce, Facebook is a more formidable rival for Snap.

Among the knocks against Pinterest is engagement. The company, unlike Facebook, Snap, and Twitter, doesn't report daily active users. It discloses that 57% of its monthly active users go to the site each week. Analysts estimate that the ratio of daily to monthly users at Pinterest is 20% to 25%, below Twitter at about 40% and Facebook, at 65%.

Cordwell agrees that this is an issue, but it's offset by the "high purchasing intent" of Pinterest users.

Yet investors will have no power at the company because Pinterest will issue Class A shares in the deal, while converting all shares outstanding held by earlier-stage investors, including the company's founders, Ben Silbermann and Evan Sharp, into Class B stock with 20 votes each.

The question for Pinterest is whether it can become an important destination for online advertisers in a market dominated by Alphabet's Google (GOOGL) and Facebook. Investors would like to see Pinterest become what Cordwell calls a "second tier" platform like Twitter or Snap, rather than a third-tier one like Yelp (YELP).

To get there, Cordwell thinks Pinterest needs $3 billion in annual revenue -- up fourfold from last year. He believes that the company has a good shot at that.

Of the many unicorns coming to market this year, this is one you may want to pin in your investing scrapbook.

Update: This article was updated to reflect the pricing of Pinterest's IPO.

Write to Andrew Bary at andrew.bary@barrons.com

(END) Dow Jones Newswires

April 18, 2019 08:05 ET (12:05 GMT)

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