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April 20, 2019, 12:05 p.m. EDT

In a unicorn IPO race, Pinterest is run down at the wire by longshot Zoom

Zoom Video’s profit and growth rate lead to a huge first-day pop that gives the videoconferencing company a lofty valuation

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By Therese Poletti, MarketWatch


Bloomberg News/Landov
Zoom Video Communications Inc. shares shot more than 70% higher in their debut Thursday.

Pinterest Inc. should have been the story on Thursday. It had the name that consumers knew, the eight-figure private valuation and a co-founder who has been a Silicon Valley superstar since the service first hit the internet.

In the end, though, Pinterest’s /zigman2/quotes/211319641/delayed PINS -3.18%  initial public offering was overshadowed by “something that IT managers might buy.”

Zoom Video Communications Inc. /zigman2/quotes/211319643/delayed ZM -5.90%  ended its first day of trading Thursday with a valuation more than $3 billion higher than Pinterest, according to FactSet, after shares literally zoomed, increasing more than 70%. Pinterest did just fine on its own, as the image-sharing and scrapbooking site popular with women priced its shares at $19 to raise $1.4 billion, then saw them jump 28%. But that couldn’t compare with Zoom’s eye-popping, dot-com-era-worthy first-day pop.

While Pinterest had name recognition in its favor, that paled versus the higher growth rate of Zoom, and the history of trouble for social-media companies on Wall Street did not help. Zoom also had the one thing that no tech unicorn had previously brought to market: Profits.

“They are completely different businesses,” said Dan Morgan, senior portfolio manager of Synovus Trust Co. “Zoom is profitable and Pinterest isn’t, but they seem closer [to profitability than Uber and Lyft]. [Zoom] is old school, these guys make something that IT managers might buy.”

Morgan said Pinterest also reminds him of other social-media companies, with a business model that revolves around data collection and advertising, the latter of which generates the bulk of its revenue. He added that the business model is perhaps getting old for some investors, especially after Facebook Inc.’s /zigman2/quotes/205064656/delayed FB -1.39%  woes over the past year.

In addition, Pinterest appears to be facing an issue similar to Snap Inc. /zigman2/quotes/205087158/delayed SNAP -2.61%  when it went public in 2017, with monthly-active-user growth rates that are gradually slowing. In the fourth quarter of 2018, Pinterest’s monthly active users grew to 265 million, up 22.7%; in the third quarter they grew 23%, in the second quarter 24.8% and in the first quarter of last year, MAUs grew 36.6%, on a year-over-year basis.

“Maybe Pinterest is a bit of a tired story,” Morgan said.

Pinterest co-founder Ben Silbermann is the more high profile of the two companies’ CEOs, in part because Pinterest is a widely known consumer brand. Silbermann worked at Google for two years, before teaming up with the two other Pinterest co-founders. Zoom CEO and founder Eric Yuan, a soft-spoken entrepreneur, came to the U.S. from China in the mid-1990s. He worked at WebEx and then Cisco after it was purchased. He got the idea for Zoom as he pondered other ways to visit his girlfriend, now his wife, in China, without the 10-hour-long train rides. Both have major controlling shares or voting power at their companies. Silbermann has a Wikipedia page, Yuan does not — at least not yet.

Zoom is not perfect. It is in a very competitive market, and you might have heard of some of its rivals: Microsoft Corp.’s /zigman2/quotes/207732364/delayed MSFT -1.44%  Skype, Alphabet Inc.’s /zigman2/quotes/202490156/delayed GOOGL -2.06%   /zigman2/quotes/205453964/delayed GOOG -2.02%  Google Hangouts and Cisco Systems Inc.’s /zigman2/quotes/209509471/delayed CSCO -0.60%  WebEx. But Zoom has smartly played nice with existing videoconferencing players like Cisco: Its software-based platform is in the cloud and works with hardware from Cisco and PolyCom, now owned by Plantronics Inc. /zigman2/quotes/206955846/delayed PLT -0.64% .

“Zoom’s Conference Room Connector can take these traditional hardware videoconferencing systems to the cloud, allowing users to leverage their existing investments while taking advantage of our platform,” Zoom said in its regulatory filing.

Most important, Zoom actually brought a profitable business to the table.

“It was the first unicorn to go public with profits,” said Alejandro Ortiz, principal analyst at Shares Post Inc., a secondary market for selling shares of private companies.

Zoom also had a higher growth rate than Pinterest. Zoom’s revenue soared 118% to $330.5 million in its most recent fiscal year, making it a huge appeal to growth investors who have felt that they have missed the biggest growth phases of the latest IPOs. Pinterest had a bigger annual revenue total at $756 million, but the 60% increase from the year before lagged Zoom’s staggering performance.

Momentum investors clearly were excited about Zoom’s growth rates and profits, but now the company may be burdened with its hefty valuation. As MarketWatch pointed out Thursday, the company is now trading at 49 times its annual revenue, giving it the highest valuation relative to sales on Wall Street.

Perhaps it is to Pinterest’s benefit that Zoom was the one that ended up with the biggest pop, as that valuation will put lots of pressure for future earnings to live up to. But it sure feels like the nerdy girl in the back just won prom queen instead of the head cheerleader.

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$806.90 billion
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$ 45.29
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P/E Ratio
N/A
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Therese Poletti is a senior columnist for MarketWatch in San Francisco. Follow her on Twitter @tpoletti.

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