Is Pinterest Really Worth More Than Twitter?

Source: Pinterest

The funding freeze facing start-ups today has shone a bright light on the soaring valuations of privately held unicorns, like emerging social media power Pinterest.

With its most recent valuation hitting $11 billion, the company's focus under CEO Ben Silberman has shifted toward revenue growth and monetization. Thankfully, Pinterest has developed a clear plan as to how it could eventually make money.

However, as it seeks a toehold in the rarefied realm of the dominant social media platforms, the question remains: Should Pinterest be worth more than more established names like Twitter (TWTR +0.00%)? Let's take a look.

Inside Pinterest's $11 billion valuation

Pinterest last raised funds in March 2015, when the visual bookmarking start-up saw its valuation more than double from $5 billion in May 2014 to the $11 billion valuation it carries today. For a number of reasons Pinterest's valuation appears likely to hold for the foreseeable future, and potentially until its eventual IPO.

To date, the company has raised roughly $1.3 billion in total funding across eight complete rounds of financing, plus one secondary market follow-on offering last June.  In terms of total dollars raised and number of rounds, this places Pinterest on the more established end of the fundraising spectrum, a point at which companies are often expected to grow into their valuations ahead of their eventual IPOs. However, to do so, Pinterest will need to make significant progress in its monetization efforts.

Source: Pinterest

According to fundraising documents leaked to TechCrunch, Pinterest expected 2015 sales to total $169 million. However, Pinterest expects its focus on courting marketers, particularly from the retail and consumer packaged goods industries, will allow the company to grow its revenues to $2.8 billion by 2018.

For simplicity's sake, assuming straight-line average annual sales growth implies Pinterest will generate revenue of roughly $430 million in sales this year. From a valuation standpoint, this means Pinterest's current price-to-sales ratio, based on its assumed 2016 revenues, is roughly 25. To be clear, this should be viewed as an approximation, but hopefully it's useful for illustrative purposes, particularly when comparing Pinterest to competitors like Facebook (FB 0.70%) and Twitter.

Should Pinterest be worth more than Twitter?

In terms of valuation analysis, Facebook's gargantuan $335 billion market cap would render such a question absurd. However, Twitter's market capitalization of $10.3 billion, as of writing, makes for a more interesting head-to-head comparison between social media competitors. Here's a quick overview of how Pinterest stacks up to Twitter today and at the time of its IPO.

Data source: Author's calculations. (Pinterest 2016 figures are estimates.) 

Viewed this way, Pinterest's numbers are in line with those of Twitter at the time of its 2013 IPO. It's also interesting to note how Twitter's valuation has shifted since then. Largely as a result of its effectively stagnant user growth, Twitter's long-term opportunity now appears smaller than originally envisioned, which has weighed on the microblogging platform's valuation, even as it finds ways to generate more revenue from each user.

So, returning to the original question: Should Pinterest be worth more than Twitter? In my view, the answer is a qualified yes. The key factor in this analysis is Twitter's struggle to grow its user base.

Importantly, Pinterest has yet to encounter a similar headwind, but that doesn't mean it won't. Pinterest's user base skews disproportionately toward women.  This still allows plenty of room for user growth for the service, but the fact that its core product fails to resonate with half the population could hinder Pinterest's ability to grow into a Facebook-sized social media product over the long term.

So while I think Pinterest should be worth more than Twitter today, much of the hard work in evolving into a truly powerful social media platform still lies ahead in front of the $11 billion start-up.