Monday, September 6, 2021

Portfolio Updates (Aug) & my position in Chinese companies! (average price and total no of shares)

https://www.ft.com/content/6627a239-e3b4-43bb-995b-6b4f4d09d3bd

As I have not been feeling too good recently- physically and mentally, I will be keeping this blogpost short and updating my net worth and how my portfolio has been performing lately for the month of August. After this, I still have to get back to work, as I have been behind time due to some sort of insomnia.

I had a quick look at my transactions for August; majority of the transactions are buying the Chinese tech companies- Alibaba, Tencent, and Bili Bili. Despite the fear of China's big tech regulation, I see it as an opportunity to add more to my position at such attractive valuations. Every now and then, when news on big tech regulation is being publicized and sensationalized in western news media, the Chinese tech stocks will drop by a few percentage points. If one could objectively think of the impact of regulation on the internet companies and do a proper valuation with a wide margin of safety, even the conservative investor would discover that these shares are trading at quite a bargain.

I started a small crypto position this year and have been DCA-ing and HODL-ing when share prices tank. However, it has since made a comeback and has almost crossed $10k. Since it has crossed more than 1% of my overall portfolio, I will be including it in my monthly portfolio update from now on.

Recent Chinese Tech Purchases (average cost price and total shares)

In the spirit of sharing (because sharing is caring) and transparency, I will update this on a monthly basis till the Chinese software companies have recovered.

In alphabetical order, starting with Alibaba




Next up, Bili Bili,




BYD


JD.com


Sunny Optical




Last but not least, Tencent Holdings


If you would like to be notified whenever I buy and sell shares, you may check out my Twitter acc https://twitter.com/acquireyourfire
I will update my buy/sell orders within 24 hours.

Dividend Portfolio

There have been no changes other than selling off Link REIT to fund my Tencent Holdings purchase. The move paid-off well, as I sold it off at $74.25 HKD, a return of 8.88%.



Growth Portfolio

These are the few companies which I average-down my position after they have reported disappointing earnings results. 

Lemonade

Fiverr

Peloton

Amazon

My conviction in these companies is strong and I am looking beyond one quarter of earnings. This year, the stock market hasn’t been kind to small and mid cap tech companies. Although Nasdaq had a good run in the past eight months, the index surge is mainly driven by FAANG stocks. There are a few companies that I do not plan to hold for the long run, such as Netflix, Qualcomm and Apple, to name a few, but current market sentiments are favouring these mega cap companies, hence, I will hold on these stocks for a bit longer.

Companies which I added and performed well in the last earnings quarter

Airbnb

Tesla

Roku

Crypto Portfolio

Currently, my crypto portfolio only consists of Bitcoin and Ethereum. Will be looking at FTX token and Cardano.



Total Portfolio Value

Stocks & Crypto Portfolio: $575,675 (as of 5th Sep)

Cash at Hand: $49,155

Total Portfolio Value= $624,830 (+$17,793)

I won't be updating portfolio 2 anymore, as spoken in my previous blogpost.







Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)




Tuesday, August 31, 2021

Valuation of Pinterest

 

Source: https://www.searchenginejournal.com/pinterest-has-a-new-code-of-conduct-all-users-have-to-follow/401951/

I believe in investing with conviction, and by picking the right companies which I believe in ,I can rest easy even when these companies suffer a meltdown in stock prices.

Most of the stocks which I have blogged about are not the high performing ones in my portfolio, and I chose to write about them so that when they continue to underperform the market, I can re-read my analysis to determine if my investment thesis is still valid. Investing is not following famous investors blindly: buy when they buy, and sell when they sell. I think it is alright to read their views on certain stocks, but after listening to their opinion and outlook, one should do careful research and analysis and then invest with conviction.  

As promised, I will be doing a valuation of Pinterest.

I will be using a two-step valuation model like my previous stock analysis; however, instead of using the perpetuity approach for determining its terminal value, I will be using Earnings Before Interest Tax Depreciation and Amortization (EBITDA) multiple and do a sensitivity analysis.

I will break down the exact steps.

1. Project Monthly Active Users (MAU) and Average Revenue Per User (ARPU) for US and international Users

Assumption:  MAU X ARPU= Revenue.
Q1 2021
ARPU (US)= $3.99 USD
MAU (US) = 98 mil
ARPU X MAU= Revenue (US) = $391.02 mil USD
 
ARPU (International)= $0.26 USD
MAU (International) =380 mil
ARPU X MAU= Revenue (International) =$98.8 mil USD
Q1 Revenue=Revenue (US) + Revenue (International) = $489.82 mil USD
Reported Revenue = $485 mil USD
Percentage Accuracy= 489.82-485/ 485 x 100% = 99.18%

Q2 2021
ARPU (US)= $5.08 USD
MAU (US) = 91 mil
ARPU X MAU= Revenue (US) = $462.28 mil US
ARPU (International)= $0.36 USD
MAU (International) =363 mil
Revenue (International) =$130.68 mil USD
Q1 Revenue=Revenue (US) + Revenue (International) = $592.96 mil USD
Reported Revenue = $485 mil USD
Percentage Accuracy= 613-592/ 613 x 100% = 96.5%

One plausible explanation for the slight imprecision could be the rounding-off effect. For instance, MAU (International) of 363 mil could mean 363.4 mil or 362.5 mil.
Since accuracy level is above 95%, I think that the current method of deriving revenue is reasonably accurate.



Once we have determined the MAU and APRU growth, we can derive Pinterest’s total sales for the next 5 years. I have assumed zero growth in US MAU for the next 2 years due to the pulled-forward effect from Covid 19. As for international MAU growth, I am projecting a 30% growth rate for the next two years, as there are still untapped opportunities in Latin America and Asia Pacific regions. Also, there is a huge potential for user growth via rolling out of Pinterest features such as Pinterest Lens and AR Try on, which is only available till date in the US regions.



2.  Derive Costs of Goods Sold (COGS), and Operating Expenses (OPEX) as a percentage of revenue
Gross Profit:  Pinterest’s gross profit margins (GPM) have been improving and the last quarter’s gross margin is approaching the 80% level. I will assume an 80% GPM and gradually increase to 90% in the fifth year.

OPEX has been steadily declining to 60-70% of OPEX due to operating leverage, and I am convinced that its operating margin will continue to improve in the next five years. I will project OPEX as a percentage of revenue to drop to 30% in 5 years’ time.(general trend for tech companies).


3. Derive Stock-Based Compensation of COGS and OPEX.
As there is stock compensation which dilutes the share count, I will subtract stock-based compensation so that I do not have to account for share issuances in the future years. It was added back from GAAP to non-GAAP to derive its adjusted EBITDA.



The past quarters’ stock-based compensation component of COGS was hovering between 0.9% to 2%. Taking the average of the past few quarters gives us 1.5%.

The stock-based compensation component of OPEX stayed in the range of 20-22% in the past three quarters. I will start with 22% for the year 2022 and progressively decrease to 15% in 2026.

4. Derive EBITDA Margin

I will be using an EBITDA margin of 29%, which is also Pinterest’s latest quarter’s EBITDA margin. It’s a conservative margin considering that Q2 isn’t Pinterest’s best quarter.

Next, I will adopt Facebook’s current EV/EBITDA multiple of 19 to calculate Pinterest’s terminal value.

5. Determining Pinterest’s Weighted Average Cost of Capital (WACC)

As Pinterest has minimal debt, as Pinteret’s liabilities consists of mainly payable or deferred revenue, I will use the Capital Asset Pricing Model (CAPM) to derive Pinterest’s WACC.


Only recently has Pinterest started to generate positive Free Cash Flow (FCF) and therefore I have a lack of historical data to determine the FCF growth. As Pinterest’s capital expenditure (CAPEX) is declining every year and cash generated from operations is growing strongly, I will use a 30% year-on-year growth. I am not too worried about the projections, as you can see in later calculations that the intrinsic value of Pinterest’s share price is mainly derived from its terminal value discounted to present value.



Summing up the next five years of cash flow and EBITDA and discounting it back to present value, we obtain the intrinsic value of Pinterest.



Next up, I will be doing a sensitivity analysis to determine where the current value of Pinterest stands. Unfortunately, even the price at lower EBITDA multiples at a higher WACC is still above Pinterest’s current price.



Hence, I took another approach by trying out different percentages of EBITDA, and keeping the WACC constant since it has less impact on Pinterest’s current equity value.


Pinterest’s current valuation assumes an EBITDA multiple of 17 at 30% discount to my projection of EBITDA.

Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)



Sunday, August 15, 2021

Why The Pinterest Sell-Down Left Money on the Table

Pinterest’s latest earnings report is ambiguously described as a mixed bag of results, and that sends its share price down sharply in a single trading session. A twitter user even jokingly tweeted that the market is so quiet that you can hear a “pin” drop.

Most of the metrics reported by Pinterest had beaten analyst expectations by a landslide. For instance, revenue was $613.21 mil USD, up 125% year on year (consensus $562.13 mil USD), ARPU was $1.32 USD up by 89% year on year (consensus $1.17 USD), and adjusted earnings per share (EPS) of $0.25 USD (consensus $0.13 USD).

Unfortunately, the metric that mattered the most to analysts was the monthly active users (MAU) - a paltry 454 mil users compared to 482 mil forecasted by Street Account. The prior quarter’s MAU was 478 mil, which translates to a 24 million drop in MAU, and that is a significant loss by all accounts. Management has reiterated that the fall in MAU was due to the Covid 19 effect, as many users were spending more time outside rather than surfing the net in the comfort of their homes. Management estimated that the following quarter MAU growth will be muted. According to their estimates as of 27th July, international MAU growth of 5% and US MAU decline of 7% further proved that the slowdown is real, and gave investors the impression that management is more focused on growing its bottom line at the expense of adding more users.

The selloff showed that shareholders were probably feeling despondent and very concerned that the company had reached its peak growth, which may lead to a decline in MAU in subsequent quarters.

After the earnings release, stock celebrity Cathie Wood attempted to bring lifeboats to Pinterest’s sinking ship by buying $9 million USD worth of stocks, but even that was not able to save shares from drowning.

Till today, there has been much negativity surrounding the prospects on Pinterest with the share price resuming its downtrend. After doing a deep dive on the company, I continue to believe that the visual content company is still in its early stages of growth. With its effective monetization strategies and innovative and exciting features, Pinterest will continue to capture new markets to grow its users.

A One-Time Covid 19 Effect

When valuing a company, extraordinary items are often excluded in the calculation because it is a one-off event and not expected to repeat in the following years. Also, companies often separate one-time gain or loss from their operating earnings to give investors a sense that it does not happen frequently. Thus, I tend to view Pinterest’s MAU dip in a similar fashion, as a one-off event due to Covid 19’s effect and an upward trajectory in adding new users. The chart below, which I have also posted in my previous blog post, shows it all. Last year, Pinterest was obviously benefitting from Covid 19 lockdowns, as it adds many MAU who were stuck at home and naturally spending more time on social media like Pinterest. This increased screen time had resulted in a one-time spike in MAU. Imagine Covid 19 did not exist, and Pinterest did not benefit from the surge in MAU - then Pinterest MAU would paint a different picture showing that its MAU is ever-growing.


To the surprise of many, this is not the first time that Pinterest showed a drop in MAU. In 2018, when Pinterest was not even listed in the stock exchange and its innings of growth, there was a drop in MAU in June in comparison to its prior quarter. Yet, Pinterest continued to show no evidence of slowing down and the global MAU rebounded to 9%.

Secondly, management has also explained the user loss was attributed to users who visit the visual discovery platform on their desktop rather than mobile. These are the users who, in the words of management, ‘tended to be, on average, less engaged and generated less revenue than people who came directly to Pinterest.’

What’s more impressive is that there has been a double-digit growth in Gen Z users, despite the dip in MAU. According to Forbes, the way Gen-Z shops is very different from millennials. Instead of ecommerce shopping, which is favoured by millennials, 67% of Gen-Z prefers social commerce shopping, i.e. Tik Tok, Instagram and Pinterest. Also, 30% of Gen Z said that a seamless checkout process is important in their shopping experience. Imagine yourself in the shoes of a Gen Z-er, browsing through your feed and seeing the jacket that your favorite influencer is wearing. Within a few clicks of an integrated shopping function on your social media page, you bought that very same jacket through a seamless checkout process. Therefore, Pinterest’s recent partnership with Shopify is indeed moving in the right direction which ensures a smooth and secure payment process that does not request for shoppers’ financial details. With that being said, I believe Pinterest will continue to add more Gen Z users on its platform to fuel its further growth in MAU in years to come.

Huge Monetization Opportunity and Growth for International Market

Though there was a MAU slowdown in the US, international MAU continues to grow at 9% year on year. Furthermore, management has guided a growth of 5% international MAU for the month of July. Considering that the Covid-19 pulled forward in demand, I think the numbers are encouraging.

Revenue is approximately MAU x Average Revenue Per User (ARPU) and MAU only shows one side of the equation. The huge ARPU gap between US and International markets just shows how much ample room there is for monetization.

The chart below shows the APRU between International users and US users and that huge disparity suggests that there is ample opportunity for ARPU in international markets.





The US ARPU is 14 times the ARPU of international markets, and if ARPU in international markets could reach 50% of US ARPU, with all else staying constant (i.e. 0 growth in MAU) Pinterest could bring in additional revenue of $922 mil USD in international markets alone, and that is 150% of the current revenue.

When ARPU for the international and US markets are placed side by side, it looks as if the international markets are not growing - but don’t be fooled by the relative comparison. After separating its ARPU, it is evident from the chart that ARPU is growing exponentially.

Advertistments Accurately Targets The Right Audience

According to a study (paste link here), 89% of users are on Pinterest for inspiration for their next big purchase. Since users visit Pinterest with the intention to make a purchase, it’s easy for merchants to push the right advertisement to Pinners based on their searches and favourite pins saved. However, the same cannot be said for traditional social media such as Facebook, Instagram, or Snap, where users visit the platform to check out the latest social life of their friends, and they are not able to push the right advertisement to the viewers. More so, advertisements are probably seen as a form of distractions. That also explains the statistical report that users are three times more likely to click over a brand website on Pinterest compared to other social media websites.

What truly separates Pinterest from the traditional social media is its Pinterest Lens and its AR Try on. The former lets you discover ideas or inspiration with whatever your Pinterest lens are pointing at. For instance, snapping a picture of a stranger who wears a nice jacket which excites you will yield the result of the item that you need, resulting in a quick buying decision.

Source: https://martech.org/pinterests-lens-app-turns-phones-camera-search-bar/

Imagine trying on a product at the comfort of your home before even purchasing it - that’s the word possibility of AR Try On unlocks. With the help of AR technology, Pinterest allows you to try on different shades of eyeshadows and shop for beauty products and purchases in the convenience of your home. Management has hinted that there will be more AR features rolling out which could further drive numerous online purchases. Hence, it is not surprising that 48% of US respondents named Pinterest as the shopping platform of choice.

Source: https://techcrunch.com/2020/01/28/pinterest-launches-virtual-makeup-try-on-feature-starting-with-lipstick/

I took the sell-down opportunity to ‘buy the dip’ and average down my current Pinterest holdings. Currently it is trading at a one-year low price to sales of 15.51. From a technical analysis perspective, it is sitting at a horizontal support line that could portend a short-term rebound. The current valuation is attractive considering that there is significant room for growth in ARPU in international markets to drive up revenue. Its MAU is a closely watched metric in the following quarters, and I believe that downside risk is limited even if user growth stalls as the company already is already free cash flow positive and its GAAP income is on the green. I will be sharing the valuation of Pinterest in my next post, and hopefully the price has recovered from such a depressed level, so stay tuned!






Thank you so much for spending time to read my blog and I really appreciate you. If you enjoyed reading my blog, hope you can support me by liking my Facebook page here or share my post. You may also follow my Twitter account here, where I post my buy and sell transactions. Currently, I do not earn any fees through any affiliate programme or sponsor. If you have any queries, feel free to post them and I am happy to take questions! :)