Morning Markets: Shares of Zoom and Pinterest are set to begin trading this morning. Let’s examine where the IPOs priced, and what that tells us.
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Two companies will trade freely today for the first time. Both former startups are unicorns, reaching a valuation of $1 billion or more as private companies. Today they begin to convert private, illiquid wealth into liquid securities.
Indeed, while Zoom is going public at a multiple of its final private valuation, Pinterest is going out at a modest discount. To be clear, Pinterest’s slight miss on valuation is only so large a problem; its final valuation is in the eleven-digit range, and that’s a result. But Zoom’s enormous appreciation from private to public helps us understand what public markets are thinking.
Let’s quickly examine where they priced, and what we can learn from the new data.
But after selecting a higher, $33 to $35 per-share range, Zoom priced at $36, just over the higher interval. Per CNBC, the company is now valued at $9.2 billion.
That figure is impressive due to its size — only very rarely do startups reach a billion dollar valuation, let alone a liquid multiple of that figure — and the huge gap up it represents from Zoom’s final private valuation of just over $1 billion (more on Crunchbase here).
There is a catch in the above. Zoom’s 2018 revenue came to $330.5 million. That was up more than 100 percent from its 2017 haul of $151.5 million. But with a $9.2 billion valuation, Zoom is now worth 27.8 times its 2018 revenue. That multiple will go down after Zoom posts its Q1 2019 earnings (the new results will increase the size of its trailing revenue, boosting the size of the denominator in revenue multiple calculations, lowering the resulting figure), but only so far.
Zoom is now priced to grow like hell, and could get dinged if it misses growth expectations. Perhaps its recent history of profitability will give it more space to maneuver, but with a revenue multiple of nearly 28x, it won’t have much room for error.
Pinterest initially targeted a $15 to $17 price range for its shares. It wound up pricing its equity at $19 per share, giving it a valuation that Bloomberg pegs at $10.1 billion; the same Bloomberg report notes that “[i]ncluding restricted stock and options” in valuation calculations pushes Pinterest’s worth to $12.7 billion.
But the $10.1 billion valuation figure has raised the prospect of deflating unicorns. I’ve written about the topic here if you want more.
What’s more interesting than Pinterest ceding small valuation ground (late-stage investors have protection against such eventualities; what impact the discount will have on employees isn’t clear) is how close its final valuation came to Zoom’s own.
The gap between $9.2 billion and $10.1 billion is $900 million. That’s a lot to most folks, but for two companies formerly worth around $1 billion and over $12 billion, winding up going public within $1 billion of each other is fascinating.
Pinterest put up more than double the revenue that Zoom did in 2018, $755.9 million compared to Zoom’s $330.5 million. But Pinterest didn’t double over the year before; instead, the social giant expanded from $472.9 million in 2017 to its 2018 result, a gain of about 60 percent (more on Pinterest’s results here).
Pinterest also has a history of losses, albeit decreasing. The company lost just over $182 million in 2016, a touch more than $130 million in 2017, and about $62.5 million in 2018. Coupled to solid revenue growth, Pinterest’s results paint a clear, and proximate path to profitability.
But it’s only worth about a billion more than Zoom because slower growth and less profitability diminish the value of extant, or past revenues in the mind of investors. Pinterest is still worth more than Zoom, just not as much as you might have guessed given their relative revenue scale.
The lesson in this is that revenue alone is not all that matters. Something that Lyft recently learned, for example.
More tomorrow on how they trade, and what we can learn from that. Happy IPO day.
Illustration: Li-Anne Dias.
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