Not financial advice. I can change my mind.1 Full disclaimer available here.
Summary:
Pinterest’s valuation is getting interesting so it’s worth keeping an eye on this high growth, high margin, scalable, global business.
PINS’ value proposition is differentiated enough for users and advertisers to use the platform in addition to other social media.
Pinterest is a very valuable data collection tool because it’s the result of human curation and personalization.
Pinterest has a bright future as an e-commerce facilitator.
Pinterest needs to stay true to their mission to compete with larger networks.
While the Nasdaq had yet another amazing year, there are many growth names which performed terribly in 2021 including: Pinterest PINS. After rocketing 800% from the March 2020 low, the visual discovery engine company is now down 60% from its all time high and the valuation is getting interesting.
Although Pinterest does not consider itself a social-media enterprise, their users think of the platform as such which is what matters. Most readers would be familiar with the success of Facebook so I don't need to make the case for what a profitable business model social-media-driven commerce is. Let's get straight to the numbers and save the deep-dive company analysis for a later post.
Pin
Pinterest was launched in 2010 by chairman and CEO Benjamin Silbermann and 2 other gentlemen which have since left the company. In 11 years, the platform has accumulated a total of 444 million monthly active Pinners (users), as of Q3 2021.
That's a huge number and it looks like user growth has peaked. But Pinterest is still in the early stages of its monetisation efforts. The company was not profitable until last year and the average revenue per user (ARPU) is just $5.36 on a trailing 12 month basis. Even better: only 20% of users are US based but they account for 80% of total revenue. Here is the math:
Therefore, the business has a lot of room to grow.
Valuation
The stock is currently trading at about 10 times revenues which seems expensive but when you consider the high margin nature of the business (75% gross and 30% net) and the revenue growth rate (43%), I can see how the market gets to a $25bn valuation.
Since I don't like to take a lot of risk and therefore don't want to pay too big of a premium for growth, I am only putting a 10x multiple on 20% of total revenue - the international segment - which has the most runway.
Domestic $9bn = 4.5 x sales ~ 15x cash flow at 30% margin (conservative)
+ International $5bn = 10 x sales, the market is currently assigning that multiple to the entire business which grew by 43% YoY while international revenues increased by 125% YoY
+ Cash $2.3bn
= Market cap $16.3bn
If 10 times sales still sounds too aggressive, think of it as 4 times ARPU.
The publicly available data of Pinterest goes back to the first quarter of 2018 at which point the domestic ARPU was over 4 times what the ARPU for the rest of the world (ROW) is today. What if 3.5 years from now that ratio still holds?
On an annual basis, this roughly equates to the current global ARPU which means: cash flows for the whole company would double sometime in 2025. My estimate for 2021 is $800m of cash flows; hence, the forecast for 2025 would be $1.6bn = 800 x 2. Subtract the cash already on the balance sheet and a $16.3bn valuation implies a single digit cash flow multiple looking out a few years.
Comps
I thought about doing a relative value analysis with other social-media companies by inferring the lifetime value of a customer from their market cap and user base. The trouble is that Pinterest reports monthly active users while most competitors report daily active users and I don't know how to reconcile the two.
That said, I found the following comps interesting:
Snapchat is valued at $76bn and is not profitable
Pinterest is on track to generate more free cash flow than Twitter this year which has a $35bn market cap
Microsoft bought LinkedIn for $26bn in 2016 when the professional network had 433 million members worldwide. In the last quarter, LinkedIn generated over $3bn in sales.
There were rumours that PayPal was going to buy Pinterest for $45bn last October
Conclusion
Investors buying Pinterest right now are still taking a sizable amount of risk. However, if the stock was to trade in the mid twenties, it would be interesting to start bidding for the company with put options. The implied volatility is relatively high so why not take advantage of it by selling calls if assigned the shares.
Lastly, if you are a believer in cycles like me, then you probably don't want to tie too much capital into what has worked for the past decade (US tech). Instead, you may want to use the rotation out of growth stocks to harvest premiums and redeploy the cash into real assets such as uranium.
You can't look at the competition and say you're going to do it better. You have to look at the competition and say you're going to do it differently.
Steve Jobs
Earlier this month, I posted part 1 of this analysis which is mostly a discussion on valuation. Today's piece (January 23rd, 2022) is about the company and specifically what makes Pinterest different from other platforms. In the words of the founders:
Pinterest is designed to inspire. Pinners tell us they love how they feel on Pinterest: optimistic, confident and inspired. We work hard to keep the enemies of inspiration - comparison, cynicism, judgment - off of Pinterest.
Pinterest is about your future. People come to Pinterest to find ideas they can use to envision and act on their future, not relive the past.
Pinterest is personal, not social. Pinterest isn't about your friends or celebrities, it's about you. There are many tools to connect people, but there are few that help you connect with yourself.
Pinterest is made for real world actions. Most ideas on Pinterest can be made, bought, tried or visited. Our end goal isn't for you to browse images and videos all day. We want you to eventually make the idea you see a part of your life.
Pinterest puts Pinners first. Putting our users first means providing them with a useful and easy to use set of services that also respects their time, privacy and emotional well-being. We believe that meeting this high standard is both our ethical responsibility and the best way to build a healthy, long-term business.
The above is from the IPO prospectus: A letter from Ben & Evan.
Okay. Sounds good but...
What is Pinterest?
For users, Pinterest is a visual search engine with social-media characteristics; for businesses, it's a media/e-marketplace; for investors, it's an advertising company.
Pinterest is a platform where more than 400 million people go to each month to find inspiration. The company call these people Pinners. Pinterest show them personalised visual recommendations, called Pins, based on their interests. Pinners then save and organise these Pins into collections, called boards.
Why do people use Pinterest?
Most consumer internet companies are either tools (search, e-commerce) or media (newsfeeds, videos, social networks). As the web has become more visual (video-based) and the media more toxic, people have wanted a richer and more immersive way to experience those. Pinterest is not a pure media channel, nor is it a pure utility. It’s a media-rich utility, a visual discovery tool that is both engaging and functional.
When do they use it?
Pinners often come to the platform when something in their life requires attention, i.e. plan an event, buy a product, take a trip etc... They do not seek entertainment or social interactions online but rather look for an image or video that will spark their creativity and help them realise a project or solve a problem. For this reason, they do not engage with Pinterest as frequently as other platforms but, when they do, they engage much longer and in a more productive manner.
Who are the Pinners?
Two thirds of users are female. In the US, the Pinterest network includes eight out of 10 moms, who are often the primary decision-makers when it comes to buying products and services for their household, as well as more than half of all millennials. The company also won over a cohort of Gen Z during lockdowns. The demographics are similar internationally.
Value proposition for advertisers
People often come to Pinterest seeking relevant commercial content, meaning that they are actively looking for products and services to buy. This is a key competitive advantage for Pinterest because user and advertiser objectives are fundamentally aligned. More people use Pinterest to find or shop for products than on social networks. This is a platform where advertisements, if delivered to the right person at the right time, can feel like content.
In other words, ads do not compete with the content Pinners want to see - they are native content. This is highly attractive to advertisers because their ads are less likely to be perceived as distracting or annoying compared to other platforms. On social-media, ads are attacks on the user experience while ads on Pinterest can actually enhance the experience because people often come there with the intent to buy things.
Not only is it a win-win for users & advertisers, but it also sets Pinterest apart from their peers because they can handle a higher density of advertising. Ad load is not a constrain since the growth of the advertising business improves the core Pinner experience over time.
To get the best results, businesses want to advertise on platforms where prospects are most likely to be in a positive emotional state, away from politics, bad news and divisive content. Management often cites the social-media boycott of 2020 as the perfect example of a time when corporations cut ad spending because they did not want to associate themselves with the US elections.
As outlined in the founders' letter above, Pinterest provides a safe environment for brands to market their goods and services. Promoting next to suitable and relevant content is a real differentiator for advertisers.
The power of data
We launched Pinterest in 2010 with a simple idea: to let people collect all those things they left across the internet. We always thought collections say a lot about who you are, your interests and your aspirations for the future, and we wanted to help people find, save and organize all the things that interested them online.
Benjamin Silbermann CEO
The vast majority of Pins have been handpicked, saved and organized over the years by hundreds of millions of Pinners creating billions of boards. Pins are not the result of web crawling or indexing but of human curation and personalization. Pinterest calls this body of data the taste graph.
Pins' recommendations get exponentially better as the network grows. Many advertisers are introduced to Pinterest because content from their website was pinned, and all of a sudden, they start getting traffic. This demonstrates the organic value of the Pinterest network to potential advertisers and is a good proof point that encourages them to have paid value.
The company can better predict what content will be helpful and relevant to users because they tell Pinterest how they organize ideas. Advertisers certainly appreciate the value of catching people early in their inspiration and planning phase and then bringing them down closer and closer to a transaction.
The notion that users translate into a leading indicator of where demand is going to go really resonates with marketers. Many practical examples (Nespresso, Lego,...) can be found in quarterly earnings calls and shareholders letters. Pinterest also publishes an annual report uncovering over 100 key consumer trends so that companies can get ahead of those.
A more shoppable platform
The number one user request for years has been: I see something; it looks great; I'm ready to buy it; and then I can't find it. That's what's really driving our investments in shopping.
Benjamin Silbermann CEO
Today, manufacturers and retailers are increasingly uploading their wholesale catalogues to Pinterest. Uploaded catalogues enable Pins to be shoppable. There is huge growth in shoppable/buyable Pins.
Pinterest offers a fundamentally different experience to consumers than e-commerce websites. E-commerce is great when a consumer already knows what she wants to buy and is merely seeking a smooth transaction. On Pinterest, consumers browse inspiring images to discover what they want to buy. It's inspiration led-digital shopping. It's also becoming a more natural shopping journey as the company works toward seamless ads and seamless check-out in partnership with folks like Shopify.
Pinterest is great for small merchants because Pinners come to the platform with an open mind (not looking for one correct answer. Plus, most Pins aren't branded, which levels the playing field. It's a chance for the little guy to showcase their products in inspiring scenes. In addition to getting discovered, Pinterest give them credibility thanks to the verified merchant program.
Risk: staying on brand
The competition for internet users' time and attention is brutal. Pinterest competes for advertising dollars against much larger networks such as Facebook and YouTube. From a user perspective, the case for Pinterest revolves around the uniqueness of the platform as a personal rather than social experience. Therefore, it's critical that Pinterest stays true to their mission when trying to increase user engagement.
PINS' mission is to bring everyone inspiration to take action in their real lives. Contrast that with Facebook who just rebranded to Meta. The metaverse is pushing people to spend more time in the virtual world while Pinterest is about improving users' reality offline. Which one do you think is more conducive to revenues for advertisers: escapism or inspiration?
Back to the matter at hand: risk. One proposed way to make Pinners come back more often to the platform is to reward creators since they tend to drive higher engagement. The problem with this is that people come to Pinterest to focus on themselves, their interests and their lives not to keep up with other people.
Also, I believe there is a trade off between usage frequency and productivity. As discussed earlier, a key differentiator of Pinterest for advertisers is that users come to the platform with intent. You don't want to be turning a valuable monthly active user into a mindless daily active scroller in the name of engagement. There is "quality engagement" (Pinterest) and then there is "quantity engagement" (TikTok, Snapchat, Instagram,...)
Further reading
Lastly, I came across another research note on VIC which complement my two writeups well and include some valuable insights from the sell-side.
Update: Feb 12th, 2022
I have changed my mind on Pinterest. I still think it's a great company but I no longer feel comfortable with an entry price of $25. Since management gave guidance for the year, I started asking: what if profits actually decrease in 2022? What if analysts start to factor in stock-based compensation in their models? (I did not). What if social-media companies become dead money until they get to some stupidly low multiple because the market is so fearful about inflation?
If the tech rout continues and Pinterest vibrates around $25, then I’ll probably turn bullish again but best to stand aside for now.