One of the more prominent equity market themes investors have digested this year is the market’s sudden and severe repudiation of “unicorn” initial public offerings.
The term “unicorn” in financial parlance is itself new, originating in 2013. It refers to companies that have private market values of at least $1 billion. Nifty as it may be, a unicorn doesn’t have any requirements when it comes to profitability.
This year’s list of not-so-profitable unicorns is extensive and includes well-known names, such as Chewy (NYSE:CHWY) and ride-hailing giants Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). Social media platform Pinterest (NYSE:PINS) is also part of that group. Pinterest is dubbed a “visual discovery engine,” a unique concept in a social media world that has become increasingly dependent on photos and videos.
What isn’t unique is the post-IPO decline in Pinterest stock. The company rallied after its April IPO, but soon gave back those gains only to rally into the latter stages of the second quarter. However, since its September highs, Pinterest stock is down 50%.
For the month of November, Pinterest stock is sporting a loss of just under 8%. Much of that damage was done early in the month. That’s when the company reported third-quarter revenue of $279.7 million, just below the $281.3 million estimate. To its credit, the company was profitable, albeit to the tune of a penny per share on an adjusted basis. On a net basis, Pinterest lost 23 cents a share.
Perilous Times for PINS Stock
On Friday, Nov. 22, Pinterest stock closed at $18.65, below the IPO price of $19. Investors are right to be concerned about the company’s revenue struggles because a key component of the business model is monetizing users and generating ad revenue, standard fare in the social media space.
Of course, there are only so many internet advertising dollars to go around. After advertisers allocate to the likes of Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), companies like Pinterest are engaged in a competition for what’s left. Fortunately for Pinterest stock, there are some favorable user data points.
“As of the first quarter of 2019, Pinterest reported 291 million monthly active users worldwide,” according to Sprout Social’s Rebekah Carter. “Over one third of Pinterest’s current monthly active users are from the U.S., so there’s room for international audiences as well. According to Pinterest statistics from the brand in 2018, about 80% of new sign ups came from outside the U.S.”
Pinterest stock may also eventually realize demographic tailwinds. While Facebook’s core user base is getting older, Pinterest attracts a younger audience as 34% of its users are 18 to 49 years old. Education and income levels among Pinterest users are also superior to those of Snapchat, Twitter and WhatsApp fans.
Bottom Line: Searching for Profitability
Obviously, the primary catalyst for upside in Pinterest stock would be a clear path to profitability and increased revenue. The current environment demands that because as noted above, Pinterest isn’t the only unicorn losing money. Fortunately, some data points indicate taking a nibble at Pinterest stock may not be all that risky.
Goldman Sachs recently conducted a study of nearly 4,500 U.S. IPOs over the past 25 years, with the big takeaway being that revenue growth, which Pinterest has shown, is often the best indicator of share price performance.
If Pinterest can post steady revenue growth, investors may gave it some leeway on the timing of profitability.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.