Morning Markets: Pinterest could be set to follow fellow decacorn Dropbox into down-IPO territory.
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But the temper quickly left the chocolate, as Lyft’s shares dropped in the following days, and as of this morning are worth only a handful of change more than its original IPO price of $72. Whatever fizz it had, has gone flat.
Though I doubt that Lyft’s too worried. The company is worth billions more than its final private valuation of $15 billion, give or take. And it’s managed to reprice itself higher while adding a mountain of cash to its balance sheet. Sure, Lyft’s path to profitability is occluded, but it has lots more cash now to find its way.
Things look a bit less bubbly for Pinterest, another technology company hoping to go public for more than $10 billion. It’s going to make it, just, on a fully-diluted basis. In non-diluted terms, Pinterest could wind up worth less than $10 billion if it doesn’t raise its per-share price.
As we reported this morning, all current prices for Pinterest are under its prior private valuation. That means that Pinterest, akin to Dropbox’s own IPO, is targeting a down-valuation. Or, private market investors and Pinterest got a bit over their skis when it came to anticipating how far the company could get before going public.
When Dropbox went public, it did so at $21 per share. After an initial welcome, shares in the company dipped under its initial public value. Today Dropbox is worth a smidge over $22, or $1 more than its IPO price.
As the productivity and file-storage company has moved towards profitability as it matures, investors are, I’d reckon, changing how they value the formerly growth-centered organization.
All that sounds perfectly workable until we recall that Dropbox’s valuation got quite high when it was private, just breaching the $10 billion mark back in 2014. Today, according to Yahoo Finance, Dropbox is worth $9.11 billion. In the intervening half-decade, Dropbox’s value has fallen slightly.
It’s a bit Silicon Valley inside-baseball to fret as much as we do about private valuations, but as they are strong indicators of expected future value, when they are proven incorrect they can also provide be good roadmaps to prior enthusiasm.
What sticks out for me is that the Dropbox public-private valuation gap I understand, Pinterest is slightly harder to get. In Dropbox’s case, I suspect it was growing so quickly and efficiently that it simply got overvalued. Later, doing brilliant work to lower its cost of revenue, Dropbox became (in its own way) more of value play than a growth-at-all-costs firm. It began generating cash, only later going public.
It grew into nearly all of the value that investors expected, it just took time.
Pinterest set its high watermark valuation mid-2017, less than two years ago. (Dropbox’s comparable gap was over four years.) That means that Pinterest’s too-high private valuation was set in the current climate and not in 2014’s more ebullient capital milieu. And yet it’s still going to have to undershoot its private price unless it can reprice its public offering.
There are two ways to think about Pinterest, in my view. First, that it will likely be worth more than $10 billion when it goes public. That’s huge, and a job well done for the founders, employees, and backers. At the same time, the valuation’s implied revenue multiple tells us that previously, investors were willing to value Pinterest and a higher revenue multiple than most SaaS companies receive, for non-recurring revenue.
How you decide which valuation makes more sense comes down to the value of growth and the value of a path to profits. You could say that Pinterest has both. But if it wants to meet its last private-market valuation, it will need to convince the public market that it should pay an even sharper revenue multiple premium to companies with recurring revenue. That could be difficult.
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