How To Judge an IPO - An Example from Pinterest Each year, IPOs make some of the stock market headlines. IPOs often appear promising, but what do you really need to study to judge an IPO?
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Judging the worth and future potential of an IPO is a skill that needs to be mastered. As much as direct access trading platforms can help you trade efficiently online, it is also important to decide whether to act on your enthusiasm for an IPO or whether to temper it. There are some recent IPOs that you may want to monitor or perhaps get your hands on. Both 2018 and 2019 have witnessed lots of IPOs. With the highs of the stock market, the appetite for these start-ups and new companies had been high for investors. But after that came discussions of a potential recession, causing some of the enthusiasm to wane. IPOs Hold Promise, but How Do You Decide to Go Ahead? No matter what the economic situation is, IPOs still hold a great deal of promise. Analyst Nicholas Rossolillo points to three specific stocks that can potentially offer you long term gains. These are Pinterest ($PINS), Spotify Technology ($SPOT) and DocuSign ($DOCU). What Rossolillo found in these stocks was the potential of what they could offer, and the potential of the industry they’re involved in. When in-depth research clearly tells you that these stocks offer something that is likely to have significant demand in the future, and they are also having an efficient business model that can help them run profitably in the long term, you can go ahead. It also depends obviously on what your investment goals are. The aforementioned principle applies if you have a long term investing perspective. The Pinterest Example Take the example of Pinterest - the social networking company that enables users to put up projects and ideas and has been around since 2010. Its 300 million active users each month may pale in comparison to other social networks such as Facebook and Instagram, but it is growing quite fast and its user base is quite engaged which makes it the ideal platform for digital advertising. And global digital advertising expenditure is set to grow, from $272 billion in 2018 to $423 billion as 2022 comes along. As a result, Pinterest will be quite in demand for marketers. The increased importance of digital advertising is also seen from the statistic that digital and offline marketing expenditure together are expected to touch $826 billion by 2022 from just $693 billion
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last year. And Pinterest is in the right situation to capitalize from that, because of its engaged user base that marketers can tap into. In 2018, the Pinterest platform witnessed 60% revenue growth, touching $756 million. Since its IPO in early 2019, sales in the first quarter experienced a year-over-year growth of 54%. Q2 sales rose 62%, and it could soon hit a revenue of $1 billion this year. Current Loss Pales In Comparison to Future Potential It may be currently running at a loss with free cash flow being negative $71 billion. And it’s valuation is in the region of 16 times sales, making it quite steep. But there is so much promise for this stock, and we’ve just hit the tip of the iceberg in terms of potential to generate revenue. That’s how you judge IPOs. The future promise held by this stock makes it an IPO worth checking out. And with an advanced online trading brokerage helping you, it isn’t hard to get started.
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