Newly launched Pinterest stock has done pretty well in its first month on the market. Their first earnings report as a public stock has wiped out almost all of these gains.
The thought of investing in an IPO often conjures up dreams of getting in on the cheap on some stocks that go up a huge amount. We’ve had some very good IPO launches over the years, although people tend to have selective memories about them. We might only remember the good ones, the ones that get all the press, and not notice or forget about the bad ones, and not all of them turn out well.
Against the backdrop of the struggles of Lyft and Uber out of the gate, the Pinterest IPO has been an unqualified success up to the close of trading on Thursday, where it rose from an opening price of $23.75 to $30.86, a gain of 30% in a little over a month. If you bought this stock on April 18, at any point during the day, this trade had provided some very nice gains for you thus far.
Pinterest gained 7.8% on Thursday alone, and 16% between the open on Tuesday and the close on Thursday, as the markets recovered some of last week’s losses, and this was also the run-up period to Pinterest’s earnings report after the bell Thursday. This market move raised a lot of boats, including both Lyft and Uber, and Uber even rose above its initial trading price of $42, closing the day at $43.
Lyft has also moved nicely during these 3 days, going from $48.15 to $55.60, although still a long way from its opening price of $87.33 back on March 29. Even though more and more people are questioning whether either company can ever be profitable, and both have fundamentals straight out of a horror movie, fundamentals often don’t matter much when you get a market rally, and those holding the stock have been at least been given a glimmer of hope.
The only chance that these two ride sharing stocks had to have a good 2019 was if we would see a significant further rally in the market in general, because the companies themselves don’t have anything good going on with them, and if we look at the stocks the only thing that should come to mind is that our equity will bleed off considerably over time with no end in sight. We don’t owe negative earnings per share of course but the company does, and it’s our company if we own stock, so that should actually alarm people more than it does.
The Belief in a Stock is Really What Sets Its Price
Stock prices are simply what people want to pay for it though, whether or not this makes sense and it never really has to, because it is sentiment that is being priced here, not the company. Pinterest’s sentiment started out pretty well and has improved lately, at least up until this earnings report.
Like Uber and Lyft, Pinterest is also losing money, although nowhere near as much as these other two. Some may wonder why anyone would want to own a piece of a company that is losing rather than making money, betting the stock will go up as the company goes further and further in the other direction, but investors price a lot more into a stock than just the company’s current results, and it’s the future results that they are banking on for the most part.
This is not to say that the current results don’t matter, and anytime a company disappoints, this will affect a stock’s price, whether that disappointment means less earnings than expected, lower revenue, lower projections for either, or anything else that comes out of the report that may paint a different picture than what we had the day before.
Analysts work hard on predicting company results, as do the company, and these predictions influence the price of stocks. We were counting on Pinterest losing 11 cents a share, and when we saw the actual number come in at a loss of 33 cents a share, this will cause people to value the stock lower.
That’s exactly what happened with Pinterest after its earnings report was released, and it immediately gave back 17% in after-hours trading. This took us very near the stock’s opening price on day 1.
Sales came in a little higher than expected, at $201.9 million versus the projection of $200.5 million. This is not a significant difference, and while on the one hand we might see this as a positive, with the company generating a bit more revenue than we expected, this also means that the three times higher losses than expected occurred in spite of it, and it’s the bottom line that matters the most here.
Pinterest Is All About Future Potential
Pinterest does have 250 million active users, so they have done a really good job in building up their business over the 9 years that they have been around. If all they have to show for this is losses of 33 cents a share in a quarter, their losing this much money this far along in the game may rightfully have us questioning their business model.
Pinterest’s valuation is based purely upon their potential to monetize this very large base of users and make money from this idea one day. As long as investors maintain the faith, the stock price can remain stable or even go up even though the company’s money continues to run into the sewer drain.
Pinterest at least trimmed its net losses from $130 million in 2017 to $63 million in 2018, so it is at least heading in the right direction, even though we may wonder when things will turn positive. The company is still focusing primarily on its revenue growth, but when you are growing revenue but still losing money, that is no real consolation.
The situation with Pinterest is nowhere near as dire as it is with Uber and Lyft though, where the hope of their making money at any point isn’t all that bright. Pinterest’s losses are much more modest, but more importantly, there may be a light at the end of this tunnel, if revenues can increase enough to overcome their operational costs.
A lot of Pinterest’s operational costs are fixed, meaning that their marginal costs per dollar of revenue declines as they grow it, in contrast to the ride sharing companies, who pay out more than they can afford to with each and every ride, due to most of their costs being variable, particularly with what they pay their drivers. If you are paying too much to drivers, paying too much to more drivers won’t help and actually makes the problem worse.
After the dust settles, investors will basically be starting this whole exercise again, starting out only a little above what it cost to buy it on its very first day in the market. This time though, we do have the negative earnings report, but the after-hours market has already digested that and it is now behind us now.
There’s not much to get excited about in this report though, and the only real thing is that revenue is growing, and in the case of Pinterest, that’s a good thing, and something we need to see keep happening, at least to the point where they get their heads above water and stop the bleeding.
If you are an IPO that has survived its first earnings call, and a bad one, and are not below where you started trading, that’s a pretty strong sign that people still believe in this stock. The belief and the reality in this case are one in the same.
There is a lot of water that will pass under this stock’s bridge in the interim, however long it takes to right their fundamentals, but we can at least say that the journey thus far has been a pretty good one, although it all comes down to how patient people want to be with them, or how the market does, and the market itself can heavily determine the direction of stock prices, much more than most people recognize.
We spend a lot of time looking at companies and assuming that business performance will drive its stock price, in spite of how clear it is to see that market forces do a lot of the work here. In the case of Pinterest and other stocks which lose instead of make money, this is a good thing, because if all we had to look at is price-earnings ratios, Pinterest would be worse than worthless as theirs is in the negative.
If we hit a bearish trend and heads start to roll, the ones that are beneath the water are particularly subject to this risk. This does not mean that Pinterest is particularly prone to this, as this really depends on the stock. When we look at how this stock has done during the May market pullback, it actually has held up pretty well in spite of being a very volatile stock, closing Thursday around the same level they started the month at, while the indexes still have a ways to go yet to get there in spite of a rally this week.
The sell-off after their first earnings report as a public stock actually wasn’t all that bad, and the fact that this was announced during a market rally certainly didn’t hurt things. We’ll have to see what staying power they have when we get another downtrend in the markets, but most investors aren’t too concerned about such things and are placing their bets on it over a much longer period than this.
Still though, even if you are investing over the long term, it still pays to time your entries. While this may not be the ideal time to be in this stock, and we might want to wait until it takes out its highs to get too excited about it, which now sits at about $10 a share higher or 40% higher in percentage terms, the fact that it has come out of this call not much lower than where it traded just 3 days ago, that may actually bode pretty well.