Pinterest Is Likely Undervalued

I know what you’re thinking — “C’mon! More sky-high valuations?” My short answer: “Yep.” The rate of appreciation of hyper-growth, late-stage private valuations is hard to keep up with. Already in the past few weeks, private companies like Airbnb, Dropbox, and Uber have broken through the $10Bn club. Wow. What shall we expect next? Well, if you’re a market bull, then set your sights on Pinterest, which — depending on how you calculate these things — could be currently undervalued, and by quite a bit. Many people believe that the combination of DAUs, strong engagement, and locking in nearly 90% female users (who often control control purchasing decisions) makes for a powerful company.

Insider Round. The first bit of evidence we have that Pinterest is currently undervalued (depending on your POV) is the most recent $5Bn investment led by SV Angel. This was not a normal deal for this fund, which leads me to believe it was partly motivated by helping the company get cash quickly, helping cash out some earlier employees (perhaps – recall that Pinterest’s cap table is quite messy from all the early battering the company received). In such a deal, a firm like SV can enjoy the carry on making the deal happen, but if this was a real priced investment by the next Wellington, the price would likely have been higher. The metrics are just insane.

Global Referral Traffic. On slide #44 of the 2014 Mary Meeker presentation, it notes that Facebook refers about 20% of global web traffic ($170Bn market cap) while Twitter is about 1% ($18Bn market cap). Pinterest is about 7% and growing quite nicely. But, that’s just the web…

What About Mobile? The WSJ reported a few months ago that over 90% of Pinterest’s traffic comes through mobile — either by users hitting mobile browsers or through their native app? In an era where mobile distribution is choked except for a apps in very specific categories, Pinterest will easily have enough of an installed web user base to bring them into the mobile and tablet world. Thinking ahead — I’ve wondered if Pinterest could somehow negotiate mobile OS integration (like Facebook and Twitter have), but outsourcing photo storage and retrieval (like Dropbox) may be too strategic for the OS to budge on.

Global Distribution. Many consumer and social sites to date took a while to internationalize because of language considerations. Pinterest doesn’t have that exact scaling problem, as photographs are a language understood by all. Like other photo-based services which have exploded recently, this consideration cannot be discounted. It speeds up the time it would take to grow and that speed gets factored into a higher price if and when the next financing occurs.

Vertical Validation. Houzz, a sort of vertical Pinterest focused on people who want to catalog and design their home interiors (and more) was recently valued at over $2Bn. In terms of commerce and closing the loop on lead-gen and transactions, Houzz is an example of what Pinterest “could” do at scale. The “could” is a consideration, however — and a serious one at that.

So, let’s discuss the “could” part — clearly we all believe Pinterest has the ability to do something big, but will they? If people continue to swarm to Pinterest and then find items they buy elsewhere, at a certain point, Pinterest will need to be a part of that transaction — less of an affiliate and more of a broker. The good thing for Pinterest is that people keep coming back, over and over again, to do the same thing. The tricky part is that Pinterest is now a big ship, adding more employees, and carrying the weight of expectations that have been thrust upon them. Will Pinterest build channels to close this loop in time? Will others products that take a vertical approach (like Houzz) start building interest-based communities around images and capture that commerce before Pinterest can? Many unknowns, to be sure, and the company is not enjoying a rate of free cash flows like Uber or Dropbox or Airbnb — but, the metrics are out of this world, and in a world where private capital seeks name brands and growth, parking more money inside Pinterest at even at $10Bn valuation right now may not be an entirely crazy idea.

Haywire is written by Semil Shah, and is published under a Creative Commons BY-NC-SA license. Copyright © 2014 Semil Shah.

“I write this not for the many, but for you; each of us is enough of an audience for the other.”— Epicurus