Pinterest, Inc. (NYSE:PINS ) has been "Pinned" on my watchlist for quite some time now. In this article, I deep dive into the company and determine whether it's worth purchasing shares at current levels.
5./15 WEST/iStock Unreleased via Getty Images
5./15 WEST/iStock Unreleased via Getty Images
As a result of the pandemic, stay-at-home orders and social-distancing policies had people spending more time on social media apps, one of which is Pinterest. Consequently, Pinterest enjoyed massive tailwinds, causing the stock to skyrocket. However, tough YOY comps and the reopening of the economy caused the stock to crater back down to where it started, down 75%+.
As we'll investigate further, the fundamentals of the company remain strong. Many investors quickly dismissed Pinterest due to the lack of growth in users. However, the company has a strong brand, technology, and network effects. Furthermore, the company has a substantial opportunity to monetize its platform, particularly with the introduction of shopping features as it transitions from an "ideas" platform to a social commerce platform.
While the stock looks extremely cheap, the slowdown of growth and competitive pressures are still a concern. Despite the risks, the stock offers a compelling value and margin of safety.
Pinterest is a visual search engine platform that enables people to discover ideas, get inspired, and take action. It is also dubbed a social commerce platform - a cross between social media and e-commerce. The company was founded by Ben Silbermann, Evan Sharp, and Paul Sciarra in 2009.
Mission: To bring everyone the inspiration to create a life they love.
At the core of Pinterest, there are 4 main value propositions for users: Discover, Save, Shop, and Create.
People who use Pinterest, or Pinners, have high intentions - they have a specific topic in mind but may or may not have a clear picture of what it looks like. Pinterest is their source of inspiration. For example, I used Pinterest to find ideas for home decor, home gym layout, and home desk setup. Others may use it for things like fashion, gardening, recipes, and so on.
When Pinners open the Pinterest mobile app or website, they are shown the Home Feed, which displays an infinite scroll of visual content, called Pins, curated based on the users' interactions, interests, and follows, powered by machine learning. Pinners can toggle between Browse (collage-style feed) or Watch (full-screen feed) according to their liking.
There are several types of Pins on the platform:
Pinners can also utilize the Search function to find new ideas and discover trends. At the same time, Pinners can use Pinterest Lens to find ideas based on real-time or saved photos. The Lens tool will then return related Pins similar to the photo of interest, which is analyzed by Pinterest's computer vision technology.
When Pinners find Pins that interest them, they can save and organize them into collections called boards and sections for future reference. This further inspires Pinners to take action. Pinners can also view other people's boards and sections to get further inspiration.
As Pinners navigate through the Pinterest interface, they may come across shoppable Product Pins, which link relevant products to a retailer's product page. This way, Pinners can seamlessly purchase products at the click of a few buttons at the retailer's website or directly through Pinterest.
Pinterest also launched AR Try On. Powered by Lens, Pinners can use augmented reality technology to virtually try on products such as lipsticks, eyeshadows, and most recently, home decor, before making a purchase. For example, Pinners can virtually place items from retailers like Crate & Barrel, Walmart (WMT), and Wayfair (W) in their homes using Pinterest Lens.
Pinners can also publish their own content to share with friends and families, as well as to build an audience. Small businesses and individual creators can also promote their products sold on third-party websites such as Shopify (SHOP).
Furthermore, selected creators may also have the opportunity to showcase how-to videos and product demos through the recently launched Pinterest TV, which is a scheduled series of long-form shows hosted by creators.
Additionally, creators and businesses can leverage Pinterest's platform to run ads and reach its over 400 million Pinners. There are a few types of formats that creators can use:
Ads on the Pinterest platform are basically content as well so they will appear in a person's feed based on her interest, interactions, and follows. This makes sure that creators and businesses can reach relevant consumers and turn them into loyal customers.
To drive even more effective ad campaigns, advertisers can use the Pinterest Trends Tool to find out what Pinners are searching for on the Pinterest platform. This is a tool similar to Google Trends, but exclusively on Pinterest. At the same time, Pinterest regularly releases trend reports such as the Pinterest Predicts 2022 report, to help advertisers identify key trends.
In summary, I've highlighted some of the main features and value propositions that Pinterest is currently offering. However, that may evolve, as Pinterest has launched a wide variety of features this year (150 new features).
In essence, Pinterest is a visual search engine and social commerce platform that inspires people to take action from the ideas that they have discovered on the platform. As a key differentiating factor, Pinterest is a platform built for intentionality while other social media platforms are solely created for the purpose of entertainment.
Pinterest operates in the app economy and social media/commerce industry. Let's see what the market looks like starting with the app economy.
According to data.io, people are spending more time on mobile apps than ever. Based on its State of Mobile 2022 report, on mobile phones, people spend 7 out of every 10 minutes on social, photo, and v ideo apps in 2021. The trend is likely to continue in the foreseeable future. Apps such as Pinterest, YouTube, and TikTok belong to this group.
This explains why businesses globally are spending marketing spending primarily on digital ads. According to Ark Invest's Big Ideas 2022, global digital ad spending totaled $440 billion in 2021 or 62% of the total advertising market. Ark expects digital ad spending to surpass $1 trillion by the end of 2029.
Source: Ark Invest Big Ideas 2022
Source: Ark Invest Big Ideas 2022
Furthermore, Ark sees powerful synergies sprouting from the combination of online shopping and social media. The fund expects social commerce GMV to grow at a CAGR of 41% over the next five years to $3.7 trillion, a major tailwind for Pinterest.
Source: Ark Invest Big Ideas 2022
Source: Ark Invest Big Ideas 2022
For Ark non-believers, I'll direct you to a more conservative estimate. According to Accenture, social commerce is expected to grow 3x faster than traditional e-commerce, from $492 billion in 2021 to $1.2 trillion by 2025, growing at a CAGR of 26%. One caveat, though. China, which has a more mature market, will contribute the bulk of this figure. As for the US, social commerce sales are expected to reach more than double to $99 billion by 2025.
Regardless, the growth of both the app economy and social commerce should be a strong tailwind for Pinterest.
Pinterest does not charge consumers for using its platform. Instead, the company charges creators and businesses through an ad-based model.
In a nutshell, Pinterest generates Revenue by delivering ads on its website and mobile app. Revenue is recognized when a Pinner clicks on an ad (CPC), views an ad (CPM), views a video ad (CPV), or completes a specific action (checkout or add-to-cart) ((oCPM)). Advertisers buy ads through an auction-based system.
Pinterest's Cost of Revenue consists primarily of website and mobile app hosting costs.
Growth in the last two years has been spectacular but we're seeing some serious slowdown in the last three quarters. FY2021 Revenue grew 52% YoY to $2.6 billion. As seen below, Revenue growth accelerated after FY2020 Q2 all the way to FY2021 Q1, but then decelerated sharply due to tough YoY comps.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
In the latest quarter, Pinterest only grew Revenue by 18% to $575 million, due to strong demand from retail advertisers, international markets, and managed SMB advertisers. However, growth was offset by slowing demand from CPG advertisers as a result of supply chain issues, as well as the ongoing war between Russia and Ukraine. While not impressive, it is still a strong quarter nonetheless as advertisers continued to utilize Pinterest's platform.
Revenue growth was driven by both domestic and international ad demand. Both segments continued their upward trajectory, although we're seeing some weakness domestically. As of the latest quarter, management decided to group together US and Canada, and break down International Revenue into "Europe" and "Rest of World" (ROW). In the table below, I've included the "old" geographic segmentation as denoted by the orange columns, as well as the "new" geographic segmentation.
Using the "old" segmentation first, in Q1, US Revenue grew by 14% while International Revenue growth remains robust at 36% YoY growth. However, it is a steep deceleration from 62% YoY for the prior quarter.
Turning to the "new" segmentation, US and Canada Revenue grew 15% to $470 million. On the other hand, Europe and ROW grew by 27% and 152%, respectively. Of course, the higher growth rates in the International segment are due to them coming from a smaller base as well as being in the early stages of monetization.
As of Q1, the split between North America, Europe, and ROW Revenue is 82-15-3. US and Canada Revenue as a % of Total Revenue is higher due to the company's earlier monetization efforts as well as the maturity of the digital ad market in the region. On the flip side, there's a substantial opportunity for the company to expand its ROW Revenue, which makes up only 3% of Revenue currently.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Revenue growth was also driven by higher Monthly Active Users ((MAUs)). Below, you can see that Global Quarterly MAUs accelerated at the onset of the pandemic. However, MAUs peaked in FY2021 Q1, at 478 million users. Since then, the numbers have declined, ending FY2022 Q1 at 433 million users. While this is a 9% decrease YoY, it is a slight uptick from Q4's 431 million.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
The decline in MAUs was due to a few reasons:
Management noted that the decline in MAUs was mainly due to Google's algorithm change. Here's CFO Todd Morgenfeld on the impact of Google Search changes during the Q4 earnings call (emphasis added):
Looking at users by platform, U.S. monthly active users coming to Pinterest from the web, desktop and mobile web declined around 30% year-over-year while U.S. monthly active users coming to Pinterest from mobile apps, who account for a significant majority of our impressions and our revenue, declined around 6% year-over-year.
Despite all these headwinds, Pinterest managed to grow MAUs QoQ, primarily due to strong global mobile app MAU growth, higher Gen Z adoption, and higher shopping engagement.
Here, we can see how MAUs have fared over the last few years and quarters. Again, I've included both the "old" and "new" geographic segmentation. As you can see, all segments decreased YoY. For Q1:
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Despite slowing MAU growth, Global Average Revenue Per User (ARPU) is growing at a more consistent cadence, driven by higher advertising demand as the company expands its advertiser base, rolls out more shopping features, and increases its monetization efforts internationally. Q1 Global ARPU grew 28% YoY to $1.33.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Breaking it down by geography, we can see that the US and Canada have a much higher ARPU, compared to Europe and ROW ARPU. As such, there are substantial growth opportunities for Pinterest in Europe and ROW given how low their ARPU currently is, and how much larger Europe and ROW MAU is compared to US MAU.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Turning to profitability, Gross Profit was $429 million, up 22% YOY. Pinterest is also showing steady improvements in Gross Profit Margins, ending Q1 with a 75% margin, due to lower infrastructure rates. There are fluctuations here and there but it is primarily due to seasonality (higher margins during the holiday season). The bottom line is that Pinterest has very high gross margins of 75%+ that present significant earnings potential.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Moving down the income statement, we can see the different components of Operating Expenses as a % of Revenue. The spike that you see in early FY2019 is due to high stock-based compensation (SBC) as a result of its IPO. Since then, Operating Expense Margins have trended downwards. R&D is also the largest component of Operating Expenses, at a 34% margin in Q1, showing that the company is heavily investing in new product launches and innovation.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
Here, we can see how Operating Profit has fared over the last few quarters. Again, Operating Margins are showing steady improvements. Do note that FY2021 Q4 Operating Margin of 21% is lower than the prior year's 29% due to a one-time $49 million SBC charge related to Evan Sharp's transition as well as a $25 million noncash charitable contribution. Overall, the improving Operating Margins show that Pinterest is enjoying operating leverage.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
In terms of Adjusted EBITDA - which adjusts for non-cash charges - the company is doing very well. AEBITDA Margins are as high as 40%+, showing exceptional cash generation potential.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
For Net Profit, Pinterest achieved profitability briefly followed by a dip back to negative territory in Q1. Again, the lower margins in Q1 is due to seasonality. Management also mentioned that the company will be reinvesting its gross profits back into the business. Therefore, we should expect margin compression moving forward. According to the Q1 Shareholder Letter:
We expect our non-GAAP operating expenses to grow around 10% quarter-over-quarter in Q2. For the full year, we expect non-GAAP operating expenses will grow between 35-40% year-over-year as we continue to ramp up our investments in our native content ecosystem, core Pinner experience, shopping, and headcount across research and development and sales and marketing.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
On a Profit Per Share basis, the trend is very encouraging, which should reward shareholders in the long run.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
All in all, Pinterest has great profitability metrics. It is a capital-light business with strong earnings potential, scalability, and operating leverage.
Pinterest's balance sheet is pristine. As of the latest quarter, the company has $2.7 billion of Cash and Short-Term Investments with virtually zero debt. Current Ratio sits at a very healthy 14x. Thus, I don't foresee any equity or debt raises given that Pinterest is already profitable and generating loads of cash.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
As shown below, Cash Flow from Operations has been improving consistently. Furthermore, Cash Flow from Financing activities has been declining since the IPO in FY2019 Q2 as the company is now self-funding.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
As you can see, Pinterest is a cash-generating machine with Free Cash Flow Margins of 36% as of Q1.
Source: Pinterest Investor Relations and Author's Analysis
Source: Pinterest Investor Relations and Author's Analysis
The company also has access to $500 million in its revolving credit facility if needed, although I do not see Pinterest tapping into it anytime soon.
In terms of contractual obligations, Pinterest has purchase commitments with Amazon for its cloud computing platform, AWS. Its remaining contractual commitment with Amazon is $2.9 billion which will be paid through April 2029.
In terms of guidance, management expects Q2 Revenue to grow just 11% YoY, which is a significant slowdown from prior quarters. During the Q1 Earnings Call, CFO Todd Morgenfeld provided additional details on the outlook for Revenue:
On the revenue side, we expect Q2 revenue to grow around 11% on a percentage basis year-over-year. Please note that our Q2 revenue guide takes into account a few considerations.
As of April 25, US and Canada MAUs were 94 million while Global MAUs were 433 million. Again, CFO Todd Morgenfeld provided more clarity on the outlook for MAU (bold mine):
We’ve provided intra quarter data points on MAUs over the last few quarters because the lifting of pandemic lockdowns in 2021 disrupted our seasonal – our typical seasonal engagement patterns and limited visibility into quarterly MAU trends.
Lockdowns began to lift for some geographies in mid-March 2021, which is when we began to see year-over-year engagement declines. Engagement continued to normalize toward pre-COVID levels throughout Q2 2021 as more geos lifted COVID restrictions. We believe that the pandemic unwind will no longer create a year-over-year MAU headwind in the third quarter of this year. So we don’t plan on providing an intra quarter update on MAUs going forward.
As you think about MAUs for Q2, I’d like to provide you with some additional context. Q2 has historically been our seasonally weakest quarter for MAUs, given that people tend to be outside more, travel more and engage in our core use cases less often. As a reminder, at the end of the quarter we calculate MAUs based on a 30 day look back from the last month of each quarter. Since June is one of our weaker months for engagement in the U.S., a snapshot of MAUs on April 25 may not predict June MAUs.
Judging from these remarks from the CFO, Revenue and MAUs may see further headwinds in the near term due to the reasons mentioned above. However, growth should return to a more stable cadence as the "pandemic unwind will no longer create a year-over-year MAU headwind" for Pinterest.
Based on my research and analysis, I identified three competitive moats for Pinterest: technology, brand, and network effects.
Pinterest is arguably one of the most unique social media platforms. As management frequently emphasized, Pinterest is a platform for inspiration, not entertainment, which is what other social media companies are focused on. As such, people who come to Pinterest are highly intentional to find ideas and make relevant purchases. Being the go-to platform for finding inspiration could set up Pinterest to be one of the most dominant social commerce platforms in the world.
Pinterest is also one of, if not, the only social media companies that do not use virality to grow. The masses often visit apps like TikTok, Instagram, and YouTube, and stay on the platform, due to highly-engaging viral content. Other platforms like Vine and Clubhouse also went viral but they only lasted for a brief moment.
For Pinterest, however, the company has been growing its ecosystem slowly and steadily since 2009 without any form of virality. Not many social media companies survive for long without virality. This shows that Pinterest has a strong, durable brand that revolves around inspiration, intentionality, and authenticity, rather than hype.
Pinterest's strong brand as a source of inspiration is also the reason why advertisers love using its platform. According to the company, ads on Pinterest are 2.3x more efficient cost per conversion and provide 2x higher return on ad spend for retail brands, compared to other social media platforms.
Pinterest uses AI, ML, and computer vision technology to recommend relevant content based on the user's tastes and interests, without going astray. Its image-and-visual-rich database enables it to analyze trends, predict consumer behavior, and be a visual search engine. Furthermore, its intuitive, user-friendly, clutter-free interface makes it an enjoyable experience for users to find ideas.
Pinterest has also rolled out hundreds of new features to enhance consumers' visual discovery abilities and social commerce experience - its AR Try On feature is a great example. Again, Pinterest's platform is unique and high-intent, far different from other platforms.
Despite being a non-viral platform, I believe the company has strong network effects as it begins to ramp up partnerships and additional features. This includes its partnership with Shopify (SHOP), which has millions of merchants under its platform. These partnerships enable merchants to promote their products on Pinterest and turn them into shoppable Product Pins, allowing its 400+ million users to shop on Pinterest seamlessly. For a full list of partners, see here.
In addition, Pinterest also expanded its product tagging tool to include Amazon Associates Program, which should encourage more creators to use Pinterest as a medium to earn additional affiliate income.
As more users, creators, and businesses leverage Pinterest's innovative social commerce platform, powerful network effects should ensue.
Pinterest is probably one of the few high-quality, profitable growth companies trading like a value stock. Here's a snapshot of Pinterest's valuation multiples:
All these multiples are trading at or below their all-time lows. By historical measures, Pinterest has never traded this cheaply before. Of course, the markets are discounting the lower growth rates expected of the company but it seems like the overshoot to the downside is likely overdone.
Compared to other social media companies, Pinterest is also trading with the lowest EV / Gross Profit multiple. I've included Google and Microsoft (MSFT) in the mix because they have YouTube and LinkedIn, respectively.
Sure, Pinterest does not possess moats as strong as some of these companies. But Pinterest has a proven business model, is a cash flow machine, and is already profitable. Furthermore, Pinterest seems to also have the highest growth potential than most, if not all, of its peers.
Pinterest is currently trading at the lowest valuation multiples during its time as a public company. Not only that, but it is trading cheaply compared to peers. I believe the stock is quite attractive at these levels.
We continue to invest in the Pinterest shopping experience. We launched the Pinterest API for Shopping, which will upgrade our product detail pages by incorporating real-time pricing and product availability.
We’re on the path to making shopping on Pinterest more personalized with the beta test of Your Shop in Q1, a customized shopping page powered by our taste-driven algorithm informed by Pinners’ unique preferences and styles. Your Shop is currently being tested with a portion of our U.S. Pinners with plans to launch more broadly later this year. Finally, we continue testing our seamless checkout experience with more merchants.
We've seen this dynamic before. This is not something new. When we were marketing the company three years ago in the IPO, we were dealing with a lot of eyes on Q2 2018, we had a user decline and the question came up, what happened? Similar dynamic, Google made an algorithm change. There were some identity issues with Facebook. Our users declined in Q2 of 2018. We responded the same way we're responding today. And every other time, there's been an algo change. We find a way to make sure that the best content is served higher in the user search results on Google. And when that happens, we see a recovery in that traffic.
We had a similar dynamic last summer. In Q2 of 2021, there was an algo change that impacted Pinterest across geographies, most notably in international markets and emerging markets. And we responded the same way we are today, which is to go back and make sure that the right content is served to users in a way that drives healthy engagement. And that will be the way out of this particular cycle. When they happen, there's usually a dip and then we recover over time.
Pinterest is one of the most unique social media platforms. In fact, Pinterest is a social commerce platform with visual-rich data. It is a discovery search engine for inspiration.
As a business, Pinterest is innovating on all fronts, launching new feature after new feature. In particular, investors should pay close attention to the rollout of its Shopping API and native checkout because these will be the main drivers of monetization for Pinterest. MAU growth is maturing, so Pinterest needs to execute on ARPU.
Competition, slowdown of growth, and lagging ARPU are big risks. However, Pinterest has a strong brand, technology, and network effect moats. Furthermore, its cheap valuation offers a compelling margin of safety for investors.
Pinterest is improving its "products across the entire inspiration-to-purchase journey." While Pinterest's growth story and cheap valuation are indeed "inspirations," they are not strong enough reasons for me to "purchase" the stock. This is just personal preference - I don't find Pinterest a particularly high-conviction stock for me.
With that said, thank you for reading my Pinterest deep dive. If you enjoyed the article, please let me know in the comment section down below. If there’s a company that you would like me to do a deep dive on, don't hesitate to share your thoughts as well.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.