Having seen ride sharing app Lyft (NASDAQ:LYFT) fall flat on its face in the wake of its recent IPO, management of Pinterest (NYSE:PINS) and Zoom (NASDAQ:ZM) may well be feeling a little apprehensive as they gear up for their first day of trading when US markets open later today.
Gone are the days, it would seem that investors would jump on any tech unicorn and ride the move higher, in the way investors did with GoPro (NASDAQ:GPRO) in 2014 and Snap (NYSE:SNAP) in 2018, and have done with other IPO’s in recent years.
Both examples saw decent gains in the first few days and weeks before financial reality caught up with them, with valuations based more on hope than expectation. Looking at both of these companies now and they are languishing well below their IPO prices with little sign that they will see those heady heights again.
The big question is whether it will be any different for Pinterest and Zoom, and the answer to that question is, maybe.
For a start both companies appear to have much more realistic valuations, but let’s look at each of them on the financials.
Starting with video conferencing company Zoom Video Communications, its pricing at $36 a share, valuing it at over $9bn and above its raised IPO price range of $33-$35. This has already been raised from the previous range of $28-$32.
Unlike a lot of its IPO peers the company is actually profitable, to the tune of $7.5m, on the back of revenues of $330.5m.
Looking at the companies S1 filing, the growth in the company has been remarkable, turning over $60.8m in 2017, against total operating expenses of $48m, and a small loss, to operating expenses of $263m, of which $185m of those were marketing expenses, and a profit of $7.5m at the end of the year to January 2019.
The big question is whether the low hanging fruit have been harvested, or whether the company can continue to grow at a decent rate to justify a $9bn valuation, with its subscription-based model.
The company’s main competition consists of legacy operators like Webex, LogMeIn and Skype, and having used these, Zoom’s offering does come across as much easier to use.
The problem it has is the technology is easily replicable, a fact that management acknowledge in their filing, and it could find itself cannibalised in the same way Facebook (NASDAQ:FB) did with SnapChat with the introduction of Instagram Stories.
Despite this the outlook is much more promising given its growth of the last three years, and also the poor quality of its competition which in the case of Webex, leaves a lot to be desired, the potential is there to grab market share.
As far as Pinterest is concerned it can be compared along the lines of Instagram, in that the user is able to share images, recipes and videos, by either pinning them to their own pin board, or other users pin boards.
Typically, the types of interests that are shared can vary from fashion, gardening, decorating, as well as other hobbies. This sharing of interests is the sort of holy grail that marketers love, and allows companies to promote deals and products around the interests of the users on the boards.
Pinterest, which had over 250m active users at the end of last year, and 2bn searches, while generating revenue of $750m, is valued at $12.7bn. The shares have been priced at $19 a share, above the target range and is slightly above a previous valuation that Pinterest received in 2017 when it raised $150m from amongst its existing investors.
Like most unicorns it has still to make a profit, but its losses are reducing, coming down from $182m in 2016 to $63m last year.
The losses certainly aren’t in the league of companies like Lyft, or Uber (NYSE:UBER) for that matter, however the biggest concern is likely to be around whether or not they can extend their demographic beyond their core audience which is 80% women. This would entail the business looking to extend their appeal to a much broader demographic without alienating their existing core user base.
Other risks are again the service can be easily replicated, while regulatory crackdowns could also limit the growth of the business, as governments become more interventionist on what can be posted on line. A key differentiator is it doesn’t have the baggage of Facebook or Twitter (NYSE:TWTR) with management not keen to invite the comparison arguing its audiences are engaged in swapping ideas on fashion, recipes and the like, rather than swapping threats and insults.
So, two new IPO’s, with lower valuations and more realistic ambitions, with the big question as to whether they can succeed where their more notable peers have not.
Only time will tell but at least management of both companies appear to have a plan and have been clear about the potential risks, and on the plus side they aren’t haemorrhaging cash, which is always a good thing, which suggests there is a greater chance of upside.
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