Pinterest's $5 Billion Market Valuation Is Not Absurd

NEW YORK (TheStreet) -- Someday, Pinterest will prove the world wrong with its potential to scale. For now, investors will just have to close their eyes and envision the social scrapbooking site turning itself into a profitable company.

Startups such as Pinterest with astronomical valuations are being poised as the next leaders in tech.

Pinterest is just in its initial stages of potential ad revenue by recently selling ads, despite it having next to no revenue. The company is valued at $5 billion thanks to raising $200 million last week from existing investors. Pinterest was previously valued at $3.8 billion following its last round of funding in October.

The four-year-old, San Francisco-based company raised $764 million from investors SV Angel, Bessemer Venture Partners, Fidelity Investments, Andreessen Horowitz, FirstMark Capital and Valiant Capital Partners.

Pinterest is part of an elite club of over 30 U.S. startups having valuation of $1 billion or more.

"Pinterest has a vision of solving discovery and helping everyone find things they'll love," Chief Executive Officer Ben Silbermann said in an emailed statement. "This new investment gives us additional resources to realize our vision."

While $5 billion valuations in smaller companies like Pinterest could contribute to reviving the Silicon Valley tech bubble, current market risk indications might also prove dangerous on the next big thing.

For instance, David Tepper, the outrageously successful hedge-fund manager of the $20 billion hedge-fund Appaloosa Management firm, who earned $3.5 billion last year, is now bearish on investing in equities.

At the annual SALT conference at the Bellagio Resort in Las Vegas, Tepper warned, "Don't be too fricking long right now. There's times to make money and there's times not to lose money."

Let's get real: Defining bubbles and billion-dollar startups can be tough to do.

Investors look at the high value of Pinterest and are skeptical about and questioning the company's expectations to generate revenue.

"Today's valuation inflation is largely regional -- concentrated in the biggest VC-backed companies in Silicon Valley," says Mark Glennon, managing director at Ninth Street Advisors whose firm provides advisory services to emerging companies and their investors. "It's driven largely by the proximity of mega-VCs needing to deploy massive sums. The strategy for some of them seems to be just to front-run what promise to be the most hyped, high-profile IPOs"

He adds, "Revenue and profitability thresholds required for IPOs remain far tighter than they were in the late 1990s, so we are on safer ground nationally today by that measure."

Building long-term value for Pinterest is key.

Despite slow ad revenue growth, Pinterest has a chance of proving skeptics wrong. Pinterest launched its first paid ads campaign "promoted pins" in March, asking for $1 million and $2 million commitments from big advertisers including General Mills (GIS) and Nestle. Pinterest priced CPMs, or cost per thousand impressions, between $30 and $40.

Social media remains a tech trend. According to Gigya, in the fourth quarter of 2013, Pinterest accounted for nearly 25% of all social network shares from third-party sites and apps. Millions of people shop social online and the numbers are only growing.

Let's take a look at some more facts.

Pinterest is aggressively capitalizing on big data. The company spoke at VentureBeat's DataBeat conference earlier this week and shared insights on how its data scientists are leveraging Amazon's (AMZN) Web Services' RedShift to run interactive analysis on its data. With money to burn, it is also experimenting and using A/B tests for further growth.

More popular than ever, there are currently over 70 million Pinterest users who have uploaded more than 30 billion pins and created 750 million boards resulting in an 50% increase over the course of six months.

The company recently increased its search and discovery offerings with new Guided Search and Custom Categories features. Pinterest also improved Related Pins in the past few weeks.

Be optimistic -- Pinterest will scale.

i believe Pinterest will indeed prove its world of skeptics wrong. Its valuations are commercially attractive. It's only a matter of time before investors will see if revenue match Pinterest's valuations.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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