Pinterest: Great Post-Recovery Tech Play (Shopify)

Pinterest: Great Post-Recovery Tech Play

Jun. 8, 2020 11:33 AM ET

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11 comments 

 

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 About: Pinterest, Inc. (PINS), Includes: FB, MSFT, SHOP, SNAP

Arne Verheyde

Chipmakers, tech, Growth, long-term horizon

(1,251 followers)

Summary

Many great tech stocks have recovered from the COVID-19 bear market, and are at or near all-time-highs.

Pinterest may be one of the few exceptions that is not at all-time-highs, and hence may present one of the few notable investment opportunities remaining at the current time.

Pinterest has a good track record of growing, investing in and monetizing its >300MAU platform. It's investing in ads, expanding merchant catalog and video.

Pinterest only just started seriously monetizing international markets last year. International is a ~3x larger market already but at 20x lower ARPU.

Two recent noteworthy partnerships are with Shopify and Microsoft.

Investment Thesis

Like market leader Facebook (FB), Pinterest (PINS) thrives on capitalizing its userbase via its ad business. Although playing in a smaller niche market, its ad business is still in the very early innings, with international markets basically untapped. Pinterest has much room to grow average revenue per user (ARPU) as well as its overall userbase, and its platform overall lends itself very well to monetization. To that end, Pinterest is also focusing more on video and merchant catalogs. Pinterest also announced two noteworthy partnerships recently, with Shopify (SHOP) and with Microsoft (MSFT).

Pinterest's revenue growth opportunity could rival that of Facebook at its IPO, or in other words, it might continue to grow at an elevated clip for years to come given the aforementioned opportunities.

Looking at the bigger picture, while it has been just about three months since the COVID-19 pandemic impacted the world and stock markets, many tech stocks in my watch list are already recovered fully, or have even rallied well past their pre-COVID-19 highs, such as DocuSign (DOCU) and Twilio (TWLO). Since my base rule is to not buy the high, I can't step into or add to those names (even if they may go to higher highs). While Pinterest too has almost fully recovered from its losses during the pandemic, the stock is still well off its all-time-highs. So the name, especially when looking at the long-term opportunity ahead, could be one of the best tech investments at the present time.

As I noted in this past article, I had some 'funding issues', which persisted through the pandemic and made me unable to pick up interesting names at their March lows, so this draws me to adding more to my Pinterest position, especially if it continues to trade below $25 or so.

Pinterest: Overview

Pinterest provides as base functionality a platform where users may pin notable pictures to their profile, or group multiple posts about a similar theme into 'boards'. Each picture is linked to its source (article/site/blog/shop) with more information. Users can also follow other users.

In terms of usage model, it could be seen more as a sort of search engine for discovering ideas (and saving those as 'pins'), rather than a real social media. Due to the source the picture is linked to, this platform naturally lends itself to advertisers.

Pinterest’s Ad Business: Untapped International Potential, But Expanding

Facebook recently reported an average revenue per user (ARPU) of $7.26, with ARPUs in the U.S. of $34, $10 in Europe and roughly $2-3 in the rest of the world. Pinterest, by contrast is in the early days of its ads business, especially internationally, with an ARPU at $4.00 in the U.S. and just $0.21 internationally, for a $1.22 combined ARPU, about sixfold lower than Facebook.

To approximation, this gives Pinterest in principle a long-term ARPU expansion opportunity of 10x in the U.S. and perhaps up to 100x internationally. As Pinterest is currently monetizing just 29 countries, revenue in international countries is literally mostly untapped.

Pinterest is already investing in its international business, which, at $50M, accounted for just ~10% of its $400M revenue in Q4, but this was up from 4.8% of revenue in Q3’18 with ARPU of $0.06. In other words, growing ARPU from $0.06 to $0.21 while also growing the userbase gives a sense of how the international monetization is ramping even in its early days.

As Pinterest reported, the company served ads in just seven countries at the end of Q4’18, but the company has grown this to 13, 19 and 29 countries through 2019. Revenue from those is naturally minimal, currently, but it indicates that Pinterest is heavily expanding. For instance, Pinterest started building a sales presence in Canada in October 2018, and saw revenue quadruple YoY in Q2.

This presents an investments opportunity of multiple years, as there should be no reason those markets wouldn't be able to reach the current $4.00 US ARPU, while the company further lands and expands into other markets.

Platform: Expanding Monetization

Pinterest is investing in several ways to capitalize on its platform. As people often come to Pinterest ("the visual search engine") with the intention of shopping, ads don't detract from the experience, but can even enhance it.

Over its first three investor letters, Pinterest has highlighted several areas, but these can be grouped into three areas: ads, video and merchant catalogs.

One is making Pinterest more advertise friendly in several ways, both in general as well as for medium and smaller businesses. This includes integration with Google Tag Manager and age targeting for international markets. Secondly, Pinterest is trying to make its platform more shoppable by growing its corpus of products (merchant catalog) from retailers. Third, the company is investing in its recommendation engine and computer vision technology, for instance its Pinterest Lens visual search engine. These could both help to get its userbase to use Pinterest for more things (the land and expand model). Fourth, Pinterest is investing in video content. Fifth, it plans to launch the Pinterest Verified Merchants (VMP) Program, which will be focused initially on fashion and home decor. Additionally, Pinterest also redesigned its iOS and Android apps in Q3, which it says has a neutral effect on monetization.

All of these improvements are yielding significant results:

• Tag adoption has increased 10x in just three months.
• The merchant catalog grew 75% in Q3 and 70% in Q4.
• Clicks to retail sites was up 3x YoY.
• Recommendation is driving a >100% engagement rate YoY.
• 150% YoY growth in conversion optimization revenue in Q4. Revenue from shopping ads grew over 100% from H1 to H2, and advertisers buying shopping ads increased by 125% in the same period.
• For video: “Users re-pin video at a rate 40% greater than static content, and video views during Q2 were greater than in all of 2018.” In total, video grew 6x in 2019.

In 2020, Pinterest aims to make advertising more automated, easier and scalable. It has launched automatic bidding for traffic objectives. This allows spending an advertiser’s budget on its platform with the lowest possible cost per click.

These numbers indicate that Pinterest is successfully executing on monetizing its platform while making it more useful for users, with ARPUs in the U.S. leading the way. U.S. ARPU grew at 41%, 41%, 26% and 26% YoY in Pinterest’s first four quarters as a public company, to $4.00 in Q3.

While revenue is forecasted to slow down from 60% 2018 to 46% in 2019 and closer to 30% in 2020 ($1.52 billion guide), I would expect revenue growth may go back to somewhat higher growth levels as the international business ramps in the coming years.

Pinterest vs. Facebook

Pinterest and Facebook share several similarities. Both are social media platforms that thrive on a large userbase, which they capitalize on via their ad businesses.

The similarities don’t end there, as, curiously, they seem to share a similar stock trajectory. Facebook IPO’d in 2012 as a $60 billion company. The initial sentiment around Facebook seemed relatively negative, as the stock price roughly halved to $18 within its first few months. As the historical price trend shows, though, investors then caught on to Facebook’s secular growth, as they learned the value of its multi-billion user platform, and Facebook stock grew 10x in just over five years.

Similarly, Pinterest rallied into the 30s range after its IPO, and it too has dropped down to half its peak, and even fell further to about ~$10 due to COVID-19.

Nevertheless, both the ARPU and userbase are much smaller for Pinterest, but this should be seen as an opportunity. Most of Facebook's growth has also come from ARPU growth, implying that it wasn't always as high as the numbers provided above.

Userbase

Pinterest also has a vast opportunity to further grow its userbase, and it is indeed growing at a healthy rate.

In the fourth quarter, Pinterest had 335 million monthly active users, representing a 28% growth year-on-year. Its MAUs were split between 88 million in the U.S. (8% YoY growth) and 247 million internationally (38% YoY growth). This indicates healthy growth, I reckon. Near-term, investors are concerned about U.S. growth, though.

In absolute terms, in 2019 the company added 52, 69, 72 and 70 million MAUs compared to the same quarter a year ago, which indicates that its growth in MAUs is steady and not really slowing down. If Pinterest can keep adding this many users for years to come, this will of course vastly expand its growth opportunity.

Quantitatively

To sum up the various metrics reported in this article. Aside from revenue, Pinterest reports monthly average users (MAO) and average revenue per user (ARPU). Pinterest also reports those three metrics for the U.S. and international markets separately.

To summarize:

• Revenue has grown at 60%, 59% and ~46% from 2016 to 2019, from $299M to $1.15B, ~90% of which came from the U.S. recently. Guidance for ~30% growth to $1.5B in 2020.
• MAUs have grown 35% from 239M in Q1’18 to 322M in Q3’19, representing a 22% CAGR during this period, though U.S. MAUs have grown from 80M to just 88M.
• U.S. ARPU has grown from $1.59 to $2.93 from Q1’18 to Q3’19, representing a 50% CAGR, but is likely to decelerate, though with still much upside as discussed.
• International ARPU has doubled from $0.06 to $0.13 in Q3’19 and $0.21 in Q4, making for a solid start to international expansion.

Shopify and Microsoft Collaborations

Two partnerships were unveiled recently.

• With Shopify (SHOP): "Shopify merchants in the U.S. and Canada can share their products to about 350M Pinterest users through the app. After it is installed, the app will allow a Shopify merchant to deploy a tag on their website, upload their product catalog and quickly publish in-stock Product Pins."
• With Microsoft (MSFT): "Microsoft says Edge will include a Pinterest-powered tool showing suggestions at the bottom of its collections feature.
  Clicking on that will take users to a Pinterest board of "similar, trending Pins" so users can quickly add similar ideas to their collection. It will also allow exports to Pinterest."

The Shopify partnership extends Pinterest's focus on adding merchant catalogs to make it more shoppable, while it seems the Microsoft one might drive additional users to the platform. Both seem like solid moves for the platform.

Post-COVID-19 Play

As discussed above, Pinterest is useful platform to many of its users and highly suited to advertising. Pinterest is investing in its platform as well as its monetization capabilities, both domestically as well as expanding internationally, which is noteworthy in its very early innings. All in all, this combination of social media and search engine, with elevated revenue and userbase growth levels should easily put it on the radar of plenty tech investors.

As noted above, the stock price declined to bargain prices during COVID-19. It has partially recovered to its levels before the pandemic, but it is still well off its all-time-highs. Pinterest currently trades around 10x P/S, which is similar to Salesforce (CRM) for instance, but below the likes of plenty of SaaS companies.

Moreover, as I noted in the intro, many if not most companies (including Facebook) have recovered and are near their highs. This, of course, does not give them the best entry point, even for a long-term investment. Since I missed the opportunity to invest during the March-April lows due to some issues, the only stock I'm really drawn to at this point is Pinterest.

Its long-term growth outlook and fundamentals are unchanged, yet it has not rallied to unrealistic levels such as Zoom (ZM).

Summary and Risks

Pinterest tanked after its Q3 earnings after showing a quarter of relatively lackluster growth and has dropped to a reasonable short-term valuation. However, this should not detract from Pinterest’s secular long-term growth story, for which Facebook serves as Pinterest’s key example and indicator that such growth is sustainable. Pinterest has also both shown that it is capable of such growth rates, as well as investing in its products and markets to continue this expansion.

Pinterest has filled a smaller, but well-executed, niche and has a solid platform. Its userbase and ARPU is growing at a decent clip and the company is investing in and entering new international markets, of which it is just in its early stages, growing from 7 to 29 monetizing countries in just three quarters.

From 2016 to 2019, Pinterest has grown at 60%, 59% and 47%, which gives it a good track record of growing and monetizing its platform over time. The recent slowdown is a result of slower U.S. MAU and ARPU growth while international expansion is still just above 10% of revenue.

Of course, it is by no means a guarantee that Pinterest will be able to sustain 40-50% growth rates in the coming years, and is currently forecasting just 32% growth in 2019. Near-term, investors are concerned about U.S. growth.

Pinterest’s ARPU compared to Facebook, and Facebook's performance in general, shows that there should be large opportunity ahead, but average usage time is likely lower. Its absolute userbase is also much smaller than when Facebook IPO’d, but it shows good growth.

Takeaway

Pinterest has sold off after its initial IPO excitement and is, and seemed to have reached a bottom, only to go even lower due to COVID-19; my initial version contained in its title "Bottomed At $18". Since then, the stock has run up on news of overtaking Snap (SNAP) and its good earnings report, only to see it fall back to well below the $18 level due to the market correction.

It has since recovered and while meaningfully above $18 now, I deem it one of the best tech investment currently that I could think of: its valuation was not excessive pre-COVID-19, especially when taking the long-term view, and it still is not. Meanwhile, many other tech stocks have rallied back to new or highs or close to. As such, I might add to the position I initiated in December in the near future.

If Pinterest continues executing as it has in the last few years to monetize its userbase, while expanding internationally as it has done recently, then Facebook might serve as an example of how the stock could fare.

Disclosure: I am/we are long PINS. 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.