U.S. Markets open in 8 hrs 10 mins

Why Pinterest Could Be the Hidden Gem of the 2019 IPO Class

Jeremy Bowman, The Motley Fool

While 2019 is still young, it's already shaping up to be an exciting year for initial public offerings. So far, we've seen debuts from Lyft and Levi Strauss. Just last week, Pinterest (NYSE: PINS) and Zoom hit the public markets, and investors are still awaiting entries from Uber, Slack, and Postmates, which have all filed to go public. 

Lyft shares have thus far been a bust, down nearly 20% from their IPO price, and there are plenty of warnings in Uber's S-1 filing. Levi's has thus far held its first-day gains, but its potential seems limited as a legacy apparel manufacturer.

One company that's long been overlooked in the social media space and could be a big winner on the market is Pinterest, which surged 28% on its opening day. Keep reading to see a few reasons why Pinterest could be one IPO that thrives.

A Pinterest board on the display of an iPad.

A Pinterest board. Image source: Pinterest.

A unique business

Pinterest competes for advertising dollars with the usual lineup of social media companies and digital platforms, including Amazon, Google, Facebook (NASDAQ: FB), Instagram, Twitter, and Snap as well as smaller specialized companies like AllRecipes and Houzz. However, the company is unique in what does, acting as a virtual pin board to inspire users looking to do things like redecorate their homes, cook a new dish for dinner, or plan a wedding or vacation.

That uniqueness gives the company a cushion against competition and a distinct value proposition for advertisers.

The power of discovery

If you know what you're looking for online, it's relatively easy to find what you want using sites like Google and Amazon. However, if you're not quite sure what you need, or you want to be surprised by something new, those sites come up short. This concept, known as discovery, is what Pinterest specializes in.

Users, which the company calls Pinners, come to the site to scour images as they search for something new like a dress for a big event or a new landscaping design. These kinds of searches represent high value for advertisers as Pinners often come to the site with the intent of purchasing something. However, discovery-based e-commerce is just in its infancy as Instagram has recently begun experimenting with the concept, and Pinterest is still in the "early stages" of building an advertising product that taps into the discovery element and the alignment between Pinners and advertisers.

As the digital ad market grows and advertisers look to tap into discovery and search for options outside of Facebook and Google, Pinterest's model should prove to be fertile ground. Pinterest has also recently embraced influencer marketing, which should also be a source of growth, much like it has been for Instagram.  

A positive place

Social media rivals like Facebook, Twitter, Instagram, and YouTube have faced a litany of problems. Critics have complained that such sites are failing to address issues such as mental health or hate speech, not to mention the usual controversy regarding user privacy.

Pinterest, on the other hand, is a respite from many of the toxic influences that have soiled social media. The company describes its model as personal rather than social, and said that 91% of its users describe Pinterest as a positive environment. The site is delightfully free of the antagonism that has come to characterize other popular social media platforms.

If the backlash against Facebook continues, Pinterest seems well-positioned to capture users who are fed up with the negativity and the drawbacks of the world's largest social network. 

How it all adds up

In 2018, Pinterest saw revenue increase 60% to $756 million and its net loss improved to $63 million from $130 million the year before. In its preliminary first-quarter report, the company said it had 291 million monthly active users, up 22% from the prior year. The bulk of its user growth is now coming from international markets though nearly all of its revenue comes from the U.S. In other words, monetizing the international market poses both an opportunity and a challenge.

Based on conventional metrics, Pinterest stock is expensive with a price-to-sales ratio of 17, but this is a company now flush with $1.4 billion in cash from its IPO that it can put to use in marketing and R&D. More importantly, it has a unique and attractive platform for advertisers in the fast-growing digital ad market. If the company executes effectively, that formula could make Pinterest a standout winner in this year's IPO lineup.

More From The Motley Fool

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Amazon, Facebook, and Twitter. The Motley Fool has a disclosure policy.