Pinterest, Inc. [NYSE: PINS] went public valued at over $10 billion and investors are happy with the stock, if the market reception it received is anything to go by. The company shot up to $24.99 after going to market at $19. The interesting thing is that, the company is yet to turn a profit. So is it really worth the price that it went to the market at? Well, there are several factors that give it the potential to be worth much more than it is worth today.
Pinterest doesn’t classify itself as a social media company, though it is more of a social media niche company. The trend in social media seems to be leaning towards many niche networks focused on specific aspects of the market. In such an environment, companies that dominate specific niches stand to win long-term. Pinterest is shaping up as a dominant player in the digital scrapbook market. Considering its recognition in the market, it could be difficult for another company to dethrone Pinterest from this market. As a dominant player, Pinterest stands to draw in the majority of advertisers, and that means dollars.
On this basis, Pinterest may be a loss maker today, but it has the potential to exponentially grow its revenues over time, and that’s why investors are valuing it at a premium. When Facebook went public, it didn’t have a fraction of the revenues it has today. However, its stock was supported by the fact that it had the potential to dominate the social media industry. Today, the company generates billions in revenues and the stock is worth hundreds of dollars, a significant gain compared to the price it was valued at, when it went public.
Then there is the fact that Pinterest has a near fanatical following by its users. In an interview with Yahoo Finance, research analyst Alejandro Ortiz stated that Pinterest’s customers are very loyal to the company and the solutions it provides. This makes Pinterest a magnet for advertisers and as it grows its grip on the market, advertising revenues stand to soar.
A good indicator of its potential is this company’s potential is its dropping losses. The company has been a loss maker, but on the whole, its losses have been declining as revenues rise. This is a clear indicator that as it solidifies its grip on the market, it will turn profitable. Amazon didn’t turn a profit for quite some time. However, due to its strong grip on the market, the company’s stock has grown consistently and it has become one of the most valuable companies in the world, at some point hitting a trillion dollar valuation.
Stock prices factor in this growth, which explains the zeal with which, the market has adopted Pinterest. As long as it continues gaining market share, and revenues, it could validate analyst views that it is strong stock. Nonetheless, markets come with risks, so it’s good to do due diligence on a stock before investing.