Last week, social media website Pinterest announced it had raised $200 million in new funding. These new monies increased Pinterest’s valuation from the $3.8 Billion mark, reported in October of 2013, to $5 Billion. But, is the company actually worth this much, or is this simply another ridiculous Silicon Valley appraisal (read more about what drives irrational investing here)?
Members of Pinterest design and share their personalized “boards” and use them to plan trips, projects, and other fashion-based bookmarks, otherwise known as “pins.” Pinterest has also become one of the most popular social media destinations for American women, with more than 30 million active monthly users; this is more than the monthly female user base of Twitter (TWTR). Additionally, Pinterest accounted for 24% of online social media usage in Q4 of 2014. This is 2% less than Twitter, and much more than LinkedIn (3%) and Google Plus (3%).
Just recently, Pinterest introduced paid advertising where companies can promote pins. These pins will show up more often in user searches, and will also show up in user category feeds. With increasing popularity among women, paid advertising introduces a new revenue stream for Pinterest. And since women are more likely to purchase online goods, Pinterest’s ad real estate sells at a premium, thus adding to its $5 billion valuation (12.5% of female internet users make online purchases compared to 9.3% of men).
Regardless of Pinterest’s increasing popularity, the valuation still appears ridiculously high. In fact, compared to other social media conglomerates, such as YouTube and Instagram, the valuation is nonsensical. Google (GOOG) purchased YouTube for $1.65 Billion in 2006, while Facebook (FB) purchased Instagram for $1 Billion in 2012 (both of which are more popular than Pinterest). Although their valuations have obviously increased since then, it is hard to understand why Pinterest, which has a smaller but dedicated demographic, would be worth more than these companies… but then again, it is the Silicon Valley.