Pinterest IPO Has Decent First Day, But Caution Advised
Many people think of IPOs as an easy opportunity to make a lot of money. The institutions do get greased, but individuals need to be very careful trading them.
Day 1 of Pinterest’s initial public offering at least held its ground during its first day trading its stock publicly, but that’s about all we could say for them at this point. If people have bought this stock and are excited about its prospects, they at least need to be well on guard for the possibility of it not panning out quite as well as they had hoped.
An IPO’s first day is only one day, but given that this is the first time that investors get to cast their vote on it, this one-day performance can be quite indicative of what we might expect from it in the near future at least, if not longer.
If there is a lot of demand for the stock, we will see this show itself on day 1, and if the demand just isn’t there, this shows itself as well. If people aren’t lining up to buy this, that in itself is pretty telling, as this is the time where excitement tends to peak, when they pull back the curtain and open the door and let the people in.
Pinterest did put in a small gain on its first day of trading Thursday, opening at $23.75 and closing at $24.40. It did make it a little above $25 in the early part of the session, but just didn’t have the momentum to go any further, as it settled in for a more modest gain, but a gain nonetheless.
While some people compare its close with its issue price, this part is not significant at all, other than revealing that the issue price was too low. Some of this is intentional though, but ordinary investors don’t get a shot at buying it prior to its offering in the market, and none of this really is relevant to its trading activity anyway.
The fact that it does look like it had a real good day if we are using its issue price as a reference point is actually pure illusion, and this is part of the reason why the issue price tends to be on the lower side, to help create this illusion. If it were issued as low as $12 and opened at $23.75, this sure looks like the stock has doubled in the same day, but this is all due to its being priced initially below market value, which is actually meaningless unless you bought it then.
It is not even a matter of seeing it well above this price as even suggesting bullishness, and for investing purposes we more appropriately would define the difference as a mistake of underpricing, even though once again some of this is quite intentional.
There are some people who will see this IPO in the news and think that it did move up over 28% on its first day, and perhaps allow this to influence their decision to jump on, thinking that it is “hot,” as it is described in the media. Barron’s article on this for instance used the headline “Pinterest Stock is Hot After Its IPO,” even though a couple of percent gain isn’t what we normally call hot.
Will Thursday’s Results Inspire Many Investors?
Will investors take this blown-up view of the stock and run with it? A few might, but the real money isn’t fooled by this and this looks pretty flat for a first day actually. We do whatever we can to position IPOs positively, and it isn’t unusual to see one do well for a while and then turn to a loser, but those who don’t actually start off hot generally have limited upside.
IPOs that start out cold like Lyft’s are a different story, and if they can’t generate any real excitement at the time of the IPO and lose money right out of the gate, this is a real bad sign and one that indicates we need to stay well clear unless we are trying to short it. The opportunities to short a stock are reduced with IPOs, but if you can, Lyft was a perfect example of this once it started to fail, which was right away actually.
Lyft hit the market at over $78, and lost on its first day. By the start of day 2, it had fallen below $70. It currently is below $60, and does not look like it has found any real bottom yet. We mentioned this as an excellent short candidate right off the bat, and it hasn’t disappointed, and may have even more in store for the bears.
At least Pinterest hasn’t started out anything like that, but when you are offering an IPO with a company like Lyft where the general feeling is that they need to fire all their drivers and replace them with robotic cars to make a profit one day, that’s just not going to excite investors very much. Some think that the $40’s is in their future soon, and it very well might be as more and more investors look to cut their losses as they continue to pile up.
Pinterest is more of a pure technology play, the kind that had investors very excited at one time, especially during the tech boom of the late 1990’s, but times have changed since then. Memories of better times still may linger, but not so much to allow for a repeat of the glory days or anything remotely close, in the case of Pinterest, at least thus far.
While we and the market have been very bearish with Lyft, Pinterest is much more neutral, but if we had to choose between bullish and bearish here, a mildly bearish view would be more appropriate than mildly bullish.
Where May Pinterest Be Heading from Here?
A comparison can be made with fans at a concert, where the amount of cheering that we hear when the band first comes on stage can tell quite a bit about how excited the fans are. While there’s a chance that the band might really outdo expectations as the concert goes on, it’s more likely that a lukewarm reception initially is going to temper the amount of cheering they will do later on.
Lyft was met with boos though, and therefore it was not surprising that the boos intensified as the music being played became even less pleasant to listen to. Pinterest’s start is more like a polite splattering of applause, and the fact that no one was really yelling their approval during the first song does make it less likely that the crowd will get on their feet and cheer anytime soon.
Uber’s IPO probably won’t get that much applause, although you never really know what will happen until they get on the stage. Uber suffers from the same broken business model as Lyft does, where they may take in $50 billion a year, but after they pay out $40 billion to drivers and deduct their other expenses, they are left in the hole. Barron’s agrees that we will need autonomous drivers to fix this, but don’t seem to realize enough just how far away this really is from a practical perspective, due to infrastructure issues.
Uber has been around for 10 years now, and if they haven’t figured out how to do better than lose a lot of money every year, with the fix likely a long way off, this is not something that investors should be excited about, unless of course the market takes the ball and runs with it anyway.
Those who remember the dot.com craze know just how far we can run the price of a company’s stock that is losing money, but this was a craze. A stock’s value is more about the future than the present, but the future needs to look bright and clear, and with the internet taxis it’s bright but not so clear yet.
Pinterest’s future is at least clearer, and in spite of their being another losing company, they at least made a profit in Q4 2018, and therefore things might be finally turning around for them. Their negative margins have been terrible up until this point, but this at least provides some hope that they may be finally getting things together.
A wait and see approach with their IPO would be wise, and they at least have the potential to be run up a fair bit, even though they did not really get off the runway very far on Thursday. While they may be more likely than not to struggle based upon what they have shown us so far, the crowd may wake up a little this week and we’ll get to see what kind of optimism is really out there.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
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