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!






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