Pinterest, Zoom Surge on Debuts, But Can They Avoid Lyft’s Fate?

Investors got a second and a third bite of the apple on Thursday as two more internet tech names went public following the rocky debut of Lyft (LYFT three weeks ago

Both Pinterest (PINS and Zoom Video Communications (ZM  surged at the open. Pinterest opened at $23.75, 25% above its initial offer price of $19, while Zoom started at $65, 81% above its offer price of $36.

Will they hold onto these gains, or will either follow the fate of Lyft, which started trading March 29 and is down about 34% from its highs. Thursday’s close will give some clues, as Lyft had already broken down some during its first trading day.

Pinterest, based in San Francisco, is an “image discovery” service, which means that its users, who number more than 250 million, post images of things they find interesting on its site.  Others can then peruse those collections, resulting in a kind of curated image directory of things.

Zoom, based in San Jose in the heart of Silicon Valley, is a video service built on top of cloud computing facilities. It’s meant to be a more modern version of services that have been around for decades, such as Cisco Systems’s (CSCO – Get Report) WebEx or the ubiquitous Polycom conference room video systems.

Both of the offerings went into today with strong signs of interest. Pinterest shares had risen Wednesday night from an initial offer price in a range of $15 to $17 to an offer price of $19. Zoom shares, meanwhile, saw their offer price raised twice between Tuesday and Wednesday, from an initial range of $28 to $32 to first $33 to $35, and then, on Wednesday night, to $36.

While the economics of both firms are attractive, their valuations are high, as is typical for tech new issues.

Pinterest actually is seeing meaningful financial improvement. Its net loss for 2018 was down sharply from 2017, at $63 million versus $130 million, with revenue rising 60% to $756 million. And the company has a very healthy gross profit margin of 70%.

At its opening price of $23.75, Pinterest is worth roughly $15.9 billion, or a whopping 21 times trailing revenue. If you regard Pinterest as an advertising play, it certainly has a much higher multiple than either advertising giants Alphabet (GOOGL – Get Report) and Facebook (FB – Get Report) , or publishers such as the New York Times (NYT – Get Report) .

Will investors sit tight to see how that monthly average user (MAU) growth scales? There is, after all, another, possibly more interesting story in advertising — that of Amazon (AMZN – Get Report) , which is just getting started taking share from Google and Facebook.

Zoom, founded in 2011, has been offering product since 2003, and in that six-year period, it has grown to a not unsubstantial size, at $330 million in revenue last year. Sales more than doubled in 2018, and the company was profitable, with operating income of $6 million. The product itself, moreover, has nice economics, with Zoom bringing in almost 82% gross profit margin.

At the opening price of $65, the company is worth about $16.6 billion, which is almost 51 times trailing revenue, a very hefty price-to-sales ratio.

The company’s accumulated deficit, happily, is quite small, at just $25 million, and the company expects that will turn to a net equity position of $581 million after the offering.

Zoom can look forward to plenty of speculation about a possible acquisition, as it is reminiscent in some ways of Skype, which was purchased by Microsoft (MSFT – Get Report) years ago. A Recode report this week, in fact, said that Microsoft had tried multiple times to buy the company without the two able to reach an agreement  

Between the two, Zoom is the more traditional tech offering, meaning, a software tool to get work done, while Pinterest is the broader concept, offering potential for all kinds of advertising and sponsorship approaches. So far, the market is voting for the practical tools approach more than it is the advertising concept.

Amazon, Microsoft, Facebook, Cisco and Alphabet are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.

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