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! :)

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! :)

Portfolio Updates (July) & my position in Chinese companies!

To say that Chinese tech stocks have been hammered down upon over the past few days is an understatement. The Chinese crackdown saga became prominent a few days after Didi’s listing in NYSE, when Chinese government introduced the cybersecurity review of the ride hailing company and suspended its new user signup, sending shares tumbling. These resulted in a spillover effect on Chinese internet stocks, causing the shares to spiral down.

A few days later, the news circulating that China would be forcing tutoring companies to go non-profit was indeed the last straw that broke the camel’s back. Tech titans like Alibaba, Tencent, Meituan Dianping and BiliBili, just to name a few, got terribly hit. To give some perspective, Tencent has lost $170 billion of market value within a month, and Bloomberg calls it “the world’s worst stock bet”.

Most of the Chinese Internet companies are either listed in NYSE or HKEX. Even world-renowned investors like Cathie Wood rushed for exit by liquidating most of her positions in Chinese tech giants.

While all seems doom and gloom for China’s top tech players, I believe these stocks will rebound at some point in time. Other than the education tech companies, their fundamentals are still strong, and are trading at an attractive valuation. From an opportunistic standpoint, it is not in the interest of CCP to see their tech company fail and lose to their US counterparts. Historically, the Chinese government follows a socialist market economy system, whereby the government must ensure a good balance between pure capitalism and people’s welfare. Hence, one should always consider regulatory and political risks in analysing any Chinese company as CCP will step in when needed to ensure that businesses are moving in the direction that aligns with the long-term interest of the country.

Due to potential regulatory risk, this crackdown will indeed leave a bad taste in the mouth to retailers and institutional investors; nevertheless, the current prices are still attractive even after factoring in a generous margin of safety.

My portfolio is also significantly impacted as well, as I have a considerable proportion of Chinese stocks in my portfolio. Since sharing is caring, I will be disclosing the recent changes in my Chinese Tech stocks and my portfolio value in them.

1.Alibaba (HKSE: 9988) and NYSE: BABA)

I bought shares of Alibaba back in 2018 before the HK listing in 2020. When the stock rout began, I went ahead to buy the HKSE:9988, and planned to divest Baba to keep all the Alibaba shares on the Hong Kong Stock Exchange.

Similar to Amazon’s ecommerce, Alibaba may experience a similar slowdown in its online shopping sector, too, and the silver lining will be in its cloud computing, which is growing year after year. It only recently became profitable and will likely play a significant role in growing its top-line and bottom-line.

NYSE: BABA

Total no. of shares= 33

Average Price= USD 209.345

HKEX: 9988

Total no. of shares= 300

Average Price=HKD 206.031

Total Loss (NYSE: BABA & HKEX: 9988) = SGD 1,499.22

Current Price-to-Sales Ratio= 5

Current Price-to-Earnings Ratio=18

To put things into perspective, its average price-to-sales ratio is 10X.

2.Tencent Holdings (HKSE: 0700)

I started doing dollar cost averaging (DCA) in 2018 with MayBank Kim Eng’s Monthly Investment Plan (MIP) of $500/month and then went ahead with Stock Monthly Investment Plan (SMIP) with HSBC HK with HKD 6,000 a month, after a year when the former stopped its MIP. It was a big payoff this year when Tencent went up to HKD 700+, and it all changed in a dramatic turn of events. Currently, I am sitting in a meagre gain of 2.71%.

I am still bullish on Tencent in the long run, as it still holds a strong moat in the gaming industry not only in China, but in the world. It is a tech conglomerate which holds a significant stake in many global companies which are not impacted by the current regulatory risk.

Current Price-to-Sales Ratio= 7

Current Price-to-Earnings Ratio=21.74

Total no. of shares= 342

Average Price=HKD 469.035

Total Gain = SGD 740.25

3.JD.COM (NYSE: JD)

I got to know this company back in 2018 when the company was not profitable then, but I like its logistics business and believe it’s the Amazon of China. I did not have a smooth start with this one, as a few months after I bought the shares, news broke that the CEO was accused of rape and potentially faced a jail term. As he is the face of the company, the share price plunged 50%, and I took the courage to average down my position at USD 27.50. Today, this piece of news is long forgotten, and investors are focusing their attention on antitrust.

Current Price-to-Sales Ratio = 7

Current Price-to-Earnings Ratio = 14.79

Total no. of shares = 90

Average Price = USD 45.36

Total Gain = SGD 3,102.41

JD.com is still the largest listed retailer in China and it aims to be a supply chain-based technology and service provider. It owns 900 warehouses, with fulfilment centres in seven cities, which is more than Amazon’s 175 warehouses. As JD’s sales are still way behind Amazon, it means that there is plenty of opportunity for growth. When JD’s e-commerce sales grow, it will ramp up its logistics and warehouse footprint, reducing the delivery and fulfillment costs and benefitting from its economies of scale. It also owns many businesses in the health, property, and cloud sectors. Moving forward, I think its lower tier cities' users will fuel its future growth.

4.BiliBili (HKSE: 9626 and NYSE: BILI)

It’s known as the Youtube of China, and unlike Youku (formerly termed as YouTube of China before BiliBili rose to fame), it positioned itself as the video hosting and streaming platform for the Gen-Z. It started with a focus on Animation, Comics and Games (ACG), but it’s expanding to cover more content categories such as pop culture, lifestyle,and educational videos. The growth is still in its infancy if you consider its accelerating MAU’s numbers at 30% YoY growth. Similar to Peloton, it has a ‘sticky’ community; and despite having to go through the hassle to complete a test before becoming an official member to comment and post, the video platform is still growing at 38% YoY with 80% retention rate.

I will be shifting all my BiliBili shares to the HK market and continue to average down in the next six months.

NASDAQ: BILI

Total no. of shares= 10

Average Price= USD 105

HKEX: 9626

Total no. of shares= 20

Average Price=HKD 683

Total Loss (NASDAQ: BILI & HKEX: 9626) = SGD 344.27

5.Electric Vehicle (EV) Sector :Ganfeng Lithium (HKEX: 1772), Sunny Optical (HKEX: 2382) and BYD (HKEX: 1211)

If the tech sector was the detested stepchild of the CCP, the EV sector would be its darling child. This is evident from Chinese homegrown EV companies such as XPeng and Nio getting much funding from State-owned Enterprise (SoE) in the race to be the largest market for EVs.

Back in March 2021, I blogged about having some EV Plays: Ganfeng Lithium, BYD and Sunny Optical. Check it out here: http://whatsbehindthenumbers.blogspot.com/2021/03/portfolio-updates-march-2021.html

I divested Ganfeng Lithium (HKEX: 1211) last week at a price of HKD 163.10, a gain of $2,159.34 or 64.54% in percentage terms. Ganfeng Lithium is the third largest producer of lithium worldwide and they are the supplier of lithium hydroxide to Tesla. My entry price was HKD 98.91 and I decided to divest it as I didn’t have a strong conviction to hold it at the current price. I will allocate my proceeds to buy more Alibaba shares.

I am currently still holding on to Sunny Optical and BYD.

Sunny Optical (HKEX: 2382)

Total no. of shares= 90

Average Price= HKD 183.248

Total Gain = SGD 808.11

BYD (HKEX: 1211)

Total no. of shares = 162

Average Price = HKD 191.67

Total Gain = SGD 1,307

Growth Portfolio

My overall growth portfolio has been pretty muted, as the Chinese tech stock route has wiped out most of the gains I have made over the month on US stocks.

Pinterest

The biggest stock loser in my portfolio is Pinterest. The visual search company recently released earnings on Thursday which reported a drop in monthly active users (MAU). The sell down signifies that investors are worried that MAU has peaked. The MAU is indeed disappointing, but it’s worth noting that US MAU under the age of 25 grew double digits year over year with strong engagements with Idea Pins. Idea Pins was only launched in May of this year; thus, I will be watching closely on whether Idea Pins could reverse the dip in MAU.

Secondly, the management has highlighted that the decline in MAU are mainly users who surf Pinterest on the web.  These are the users who generate less revenue than Pinners who surf with mobile apps. The recent drop, in my opinion, is understandable as the Q2 last year was Covid 19 lockdown season, where many users were stuck at home, resulting in a spike in user engagements. Therefore, it is like comparing a previous year’s quarter profit with one-time earnings.

The revenue growth and earnings were impressive, suggesting that its monetization strategy is working well. The growth opportunity lies in its global average revenue per user (ARPU), which is a metric I will also be watching closely. Currently, Pinterest global ARPU grew 89% to $1.32, and when compared to the US ARPU of $5.08, it signals to me that its monetization strategy is still in its early days.

Activision Blizzard

I have closed off my position in Activision Blizzard when the video game giant was sued by employees over gender bias from paying female counterparts less than male counterparts and creating disparities in career advancement. Upon further reading into the news, I also found out that women in the company are being sexually harassed and discriminated against. The management was aware of these allegations but decided to turn a deaf ear. Discrimination and sexism is something that I cannot tolerate and it is strongly against my work values, so I sold all my shares at market order and made a return of 88.88%.

 Dividend Portfolio

Other than selling my HongKong Land shares at $4.72 to settle for a 9.42% loss, there has been no changes at all.

Total Portfolio value

Stock Portfolio: $514,530

Cash at Hand: $92,508

Total Portfolio Value: $607,037

Portfolio 1 Net Worth: $514,530

Portfolio 2 Net Worth: $196,993

Net Worth (Cash+Equity): $804,031 

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. 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! :)