No, Pinterest's Stock Slide Was Not an Overreaction

When Pinterest (PINS -1.49%) delivered its first post-IPO quarterly report, everyone knew it was going to have lost money for the period. But cash burn is not the metric you want to wildly exceed expectations on, and it did.

In this segment of the Motley Fool Money podcast, host Chris Hill and Fool senior analysts Andy Cross, Ron Gross, and Jason Moser talk about why the market was right to send the stock price lower, Pinterest's growth story, its potential path to profitability, and the point at which it would start looking like an investment worth considering. They also look ahead to some other upcoming tech IPOs, and consider what they could do better than many of the recent crop.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 17, 2019.

Chris Hill: That Pinterest lost money in its first quarterly report as a public company is not really a surprise, but the fact that Pinterest lost nearly 3X as much money as expected may be why shares fell more than 10% on Friday, Jason.

Jason Moser: Perhaps. I think given what we know today, and that this is still a newly public company with a somewhat limited user base, you might see the narrative out there saying this is a bit of an overreaction from the market. I actually don't think it is. I think the reaction is pretty fair. I do think that we will probably see things get worse before they get better. With that said, the numbers were not bad. They were pretty good. Revenue was up 54% from a year ago. Monthly active users up 22%. Global active revenue per user was up 26%. The problem there is that the growth is starting to slow down. These guys were a little late to the game in going public, so that's understandable. But if you're a social network, and your name isn't Facebook, you're dealing with somewhat of a limited user base. So then, really, it becomes more a story about what you do with the user base. We're seeing cases where companies are doing a lot of productive things with their user base. I think that with Pinterest, they do have a lot of potential in the retail implications. It is a platform that favors a bit more of a commerce-style environment. An example there, companies can now upload their full catalogs to Pinterest so that people can pin things and actually commit to buying things, which I think offers a new avenue of profitability for the company down the road. But if you look at full-year expectations, they're planning to bring in a little bit more than $1 billion in revenue this year. Still going to be unprofitable. That ultimately prices the stock around 14X sales right now. We've seen this story play out before already. My suspicion is, we see this stock fall probably below 10X sales. And at that point, you reassess and see if they're making progress on the commerce side. And if they are, then it could represent a pretty good opportunity.

Hill: This is not the first time we've seen this, and it probably won't be the last, where a company comes out, they have an IPO, the stock pops. In the case of Pinterest, it was up close to 30% opening day. And then they issued their first quarterly report, and we see a scenario like this. We've got some big-name companies planning to go public later this year -- Slack, Airbnb. What do we want to see from them? It seems like, among other things, Andy, Pinterest could have done a better job of communicating what was coming.

Andy Cross: I think if you're an investor, and now you own stock in Pinterest, and you've owned it for a while, you have a pretty good, clear, especially if you're a big institutional investor, expectation of what you want that management team to deliver for a quarter, two quarters, maybe three quarters out. You don't want to see any surprises. I think if growth starts to slow or expectations come out a little weaker, that's a bad sign for those investors who previously have owned it as a private company and want to see nice gains in the public markets.

Ron Gross: There's this tug of war with the investment bankers, though. The investment bankers are going out on a road show and wanting the company to put its best foot forward, and ix-nay on the bad-news-ay, that kind of thing. But, you still need to be transparent. You certainly can't do anything that would be considered fraud. But still have a stock to sell.

Moser: Yeah. And I think for investors like us, not institutional investors, just investors looking to buy shares in these companies, it's really just about a clear path to profitability. All of these companies that are going public, great to see them out there, but they are unprofitable and you have to have an idea of when they'll be able to turn that tide.