Pinterest Makes Public Debut

We are initiating coverage of

Pinterest PINS with a narrow moat rating and a fair value estimate of $22 per share, or a $15 billion market capitalization based on our estimated share count. Pinterest is becoming a public company as it will sell 75 million shares at an IPO price of $19 per share according to The Wall Street Journal. The IPO price, which is above the range that the firm was seeking, represents a $13 billion market capitalization, slightly higher than Pinterest's last post-funding valuation. While this price is at a 14% discount to our fair value estimate, we recommend a slightly wider margin of safety before investing in this very high uncertainty name.

Pinterest, an online product and idea discovery company is focused on carving out a pieced of the global digital advertising space. While we don't expect Pinterest to displace online advertising behemoths

Alphabet GOOGL GOOG and

Facebook FB or up-and-coming

Amazon AMZN , we do expect it to attract a small pinch of digital ad spending which we estimate is an addressable market of nearly $500 billion.

We rate Pinterest as having a narrow economic moat and stable moat trend based on the network effect and intangible asset (data) moat sources, which we think can drive the company to profitability and excess returns on invested capital in the future. With more than 250 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the firm can attract more online ad dollars. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel--from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the firm to gradually increase its share of the U.S. digital advertising market, after which, as its international users (mainly in Europe) increase, it will attract more ad dollars for that audience.

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