What a difference a week makes.
The sudden shift in investor sentiment from euphoria to skepticism following the botched Lyft Inc. (LYFT, Financial) initial public offering has caused both Uber and Pinterest to adjust their previous IPO pricing downward. Now, suddenly hardened “tech-hungry” investors must wonder how the company’s underwriters could have possibly valued the company at $24 billion. One wonders, are any of these now-skeptical investors the same ones who took a leap of faith with Lyft?
A contrast between the Lyft and planned Pinterest IPO is illuminating.
Here is one of the principal differences between the two offerings. Lyft’s offering price placed the company at a significant premium based on its last round of private financing. It revised its valuation range upward last month, assigning a valuation of more than $24 billion. Lyft was assigned a private-market valuation of $15.1 billion last year. A question for disillusioned Lyft IPO investors: shouldn’t you have inquired pre-IPO how that valuation vaulted almost 50% while the company continued to pile up losses?
By comparison, in an April 8 filing with the Securities and Exchange Commission, Pinterest set the price range for the new issue between $15 and $17 per share. That is well below the price at which Fidelity acquired an interest in the company in 2017 at $21 per share; at a mid-range price level of $17 per share, it represents an almost 26% reduction from the private offering price Fidelity paid. The new price range would give the company a valuation between $9 billion and $11 billion. In short, Pinterest has readjusted its valuation downward to realistic levels, relative to private funding valuations — the exact opposite path Uber and Lyft followed.
A brief review of Lyft’s and Pinterest’s financials and the resultant original valuations assigned is instructive.
Pinterest is close to profitability on an annualized basis and its operations were in the black for the fourth quarter. The company had losses of $75 million in 2018, in contrast to a $911 million loss for Lyft. Though the companies are very different, the staggering loss differential between the two companies in conjunction with the value, untethered to reality, nonetheless assigned to Lyft is simply astonishing.
Pinterest had revenue of $756 million in 2018, a healthy increase from $472.9 million in the prior year. The company’s losses contracted to $63 million from $130 million in 2017.
James Cordwell, an analyst at Atlantic Equities, gives Pinterest a target price of $23 per share. Cordwell anticipates the company’s appealing social media niche will enable it to continue the robust growth in its user base. He projects significant monetization potential and anticipates 32% annual revenue growth from 2018 through 2022.
Pinterest does share one similar trait with Lyft. Like Uber and Lyft, Pinterest will most likely be valued based on its revenue. At an IPO price of $16, the company would have a valuation of eight times its projected $1.1 billion in sales for 2019. While the sales multiple is not utterly fantastical, it may be a bit rich in comparison to other social media companies. Snap Inc. (SNAP, Financial) is valued at nine times revenue; Twitter (TWTR, Financial) and Facebook (FB, Financial) are valued at approximately 7 times sales.
Additionally, Pinterest, like Lyft, is issuing nonvoting class A shares to those who buy on the offering, while issuing class B voting stock to early investors and the company’s founders.
Regardless of the eventual fortunes of the latest unicorns, for IPO investors, here is a sobering statistic: according to IPOScoop.com, out of the previous 100 IPOs, 65 dropped from their initial offering price. For those companies going public in 2018, returns from the IPO price are yielding approximately -2.3%. Here is an even more ominous sign for investors hungry for new deals. According to Renaissance Capital, secondary market trading after the first day’s post-IPO close were a dismal -16.9%.
Laura Forman wrote in The Wall Street Journal recently that the way around the dismal intermediate-term return of IPO issues is to anticipate the inevitable drop by overpricing the offering. That’s a little like the ubiquitous retail strategy of marking up original pricing 60% before announcing a dramatic 49% off sale. Forman’s recommendation seems not to suffer fools gladly. However, after the Lyft valuation fiasco, I’m not sure many investors or a company’s underwriters will subscribe to such a devious pricing strategy.
Disclosure: I have no positions in any of the securities referenced in this article.
Read more here:
- The Enduring Principles of Graham and Dodd
- EU Heightens Scrutiny of Facebook
- Lessons From the Lyft IPO
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