Last week, online virtual scrapbooking site Pinterest announced the completion of yet another round of funding that ended with a tally of some $225 million, and later confirmed subsequent estimates that put its valuation at some $3.8 billion.
This is a huge market-cap for a company of 150 employees that was founded only in 2009, and has understandably become the focus of a great deal of commentary. At the same time, investors should not let sticker-shock distract them from the fact; Pinterest’s facility for raising cash is just the most recent symptom of the hysteria over social-media tech stocks. How else could a company that has yet to generate one cent of revenue have the temerity to ask for, and receive, so much money?
The Social Media IPO Craze
Difficult as it may be to believe, social media companies were holding IPOs prior to Facebook’s (FB) NASDAQ disaster last year, and even prior to LinkedIn’s (LNKD) the year before that. It’s just that, especially in the case of Facebook who for a considerable period of time had resisted near-constant pressure to start selling shares, these IPOs had simply not yet reached the threshold of interest necessary to become the media event/spectacles that they now are.
Facebook’s May 2012 IPO was a highly-publicized mess, but one that the company was able to overcome in a relatively short year, particularly after its business model was validated by earnings for the first and second quarters of 2013 that showed enormous increases in revenue as a result of advertisements. For its part, LinkedIn has done tremendously well since its 2011 IPO, and this year has seen the stock more than double to just shy of $250 per share.
Advertising Dollars & Mobile Devices
The much vaunted “social media business model,” despite what real or imagined life-enhancement it may provide for users, has so far established its ability to generate substantial profits and returns. Social media platforms like Facebook, and companies deeply embedded in social media, like Google (GOOG) , have by now proven beyond a doubt that ambitious, and innovative techs don’t have to charge users for services,, and can instead rely entirely off of revenue from advertising.
Advertising revenue, in turn, is becoming increasingly dependent on/driven by the rise of mobile devices. And as competition in the mobile market increases, devices will become more refined, user friendly, and efficient. In all probability, progress in the technology will develop its
The next highly anticipated IPO to originate from the tech sector’s social media clique is Twitter ($TWTR). The wildly popular social messaging service has a current estimated valuation of some $11 billion dollars, and if one is to take the tone of financial media as a reliable indicator, it looks as though the stock’s debut will be nothing short of a cultural event.
Some of Twitter’s preparations for its IPO perfectly demonstrate the combined importance of mobile and ad revenue for these companies. Last month, the company announced design changes to its service the goal of which was to upgrade the “user experience” with a greater emphasis on visuals and content streams, which also conveniently makes for better and more effective advertising. This is similar to the aesthetic makeovers introduced by Facebook with it began collecting advertising dollars less than a year ago.
Pinterest is not the only social media outfit that investors and commentators have been on about recently; Snapchat has raised about as much money, there will soon be ads on Instagram, and there's still Reddit, Tumblr, and WhatsApp that offer users more or less distinct variations on the social media theme, and whose names are frequently bandied about these days.
If the major pull of these companies is their potential to monetize through advertising, however, it would seem that Pinterest may be worth all the cash it has received.. While other platforms have to find ways to integrate advertising into a user’s stream of personal content with the least amount of disruption, Pinterest’s scrapbook theme is visual by design, and thus uniquely ad-friendly.
As an essentially ocular experience, scrapbooking will also provide an ideal opportunity for advertisers to target their pitches in the most granular way possible. The collection of images, products, themes, and other objects that make up a scrapbook are, presumably, closely related to the desires and wants of a particular individual, and saves advertisers the trouble of having to make educated guesses based on purchasing or search history alone.
For the time being, Pinterest says it is using all that cash to expand operations; the company has just introduced its service to Italy, France, the UK, and claims to be targeting 10 additional countries by the end of this year. The company has also, of course, been dumping funds into improving the mobile experience of its service, and has just concluded a deal to be pre-installed on Android phones that will be distributed by Telefonica throughout South and Central America and Europe.
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