Description

Pinterest is a visual search engine/online scrap book application that helps consumers get ideas, get inspired, and develop, curate, and hone their tastes. It has utility as a tool to plan (what to cook/how to decorate) as opposed to communication or entertainment. In this way, Pins is not a social network where consumers go to communicate with friends or share personal information in a social setting. Pins is investing in building a short-form creator-driven publishing model-that in success, would grow engagement, add more surface area to monetize, and potentially help the business expand into a more full-funnel shopping experience.

 Pinterest was founded in 2009 and currently has ~430mm MAUS, and generated $2.5B in revenue in 2021. The users are split 86mm in the U.S. and 346mm. international. I am looking at this on 2023 numbers because I believe that 2022 is not going to be a good year for Pins (market expects this); 2023 can be a better year, and the stock is attractive on 2023 estimates of $4B revenue and $1B in EBITDA (3.3x EV/Sales/~13x EV/EBITDA). Sales have grown from $472mm--~E$3B to 2017-2022 and EBITDA has gone from -$121mm in 2017 and E$719mm in 2022.  If the market see directional improvement in the business from MAU growth and/profit growth, the stock could re-rate substantially.

            Due to Pinterest’s differentiated use case among digital platforms, and the strong alignment between consumer intent and advertiser, I believe that Pinterest has favorable and sustainable business model with the potential for user growth and ARPU growth. Specifically, Pinterest users often come to the app to get ideas and thus are open to new products and services. The user has high commercial intent and is open to ads where the ads serve more as content and not an interruption of the user experience. If a Pinner searches for idea to decorate a gym, it is reasonable to believe that the Pinner is or will be in the market to buy items to decorate a gym. That creates good top-of-funnel proposition for the advertiser, and over time, potentially more full-funnel. For advertisers, Pins offers a great opportunity to reach the user early in their purchase consideration, particularly given that the vast majority of searches  on Pins are unbranded.

As is true with other digital advertising platforms, the economics are favorable and should improve with scale. At $2.5B in revenue, Pins already has 80% gross margin, and 15% EBITDA margins. The business is capital efficient (cap-ex ~1% of sales), and does not require large net working capital investment to scale. Growing scale tends to improve the economics as fixed sales and marketing expense are leveraged and the marginal cost to deliver an ad impression is low. Given the margin structure, the real prize is to build a model that can sustain high rates of growth on a high revenue base where Pins earns some recurring allocation of advertiser budgets for a sustained period. If Pins can continue to improve its utility as a tool to plan, get inspired, and get ideas for actionable commercial activities there is a reasonable chance it can build a scalable and defensible platform that is much bigger and more profitable.   

            The near-term concerns with Pinterest are declining user-growth in U.S, the unwinding of the Pandemic bump that was a boon for Pins as many people were in lock-down searching for stay-at-home content (redecorating/cooking) that are popular on Pins, the op-ex spend growth for 2022 as Pins works to build a creator-led video-content ecosystem and grow its on-platform shopping functionality, and the general slowdown in ad-spend resulting from retailers pulling back in light on supply chain challenges and now economic concerns.

            The long-term structural concerns with Pins are the ability to grow engagement (proportion Weekly Active User / Monthly Active User Ratio is 58%), the defensibility of the business in light of challenges from existing and emerging competitors (Tik-Tok), a management team that is perceived to move a little slow and does not take enough risks, and the overall risk to the monetization models of digital advertising as platforms (IOS) and regulations are dynamic.

            Still, I find the risk/reward is favorable at this price. As noted above, the business is not expensive on 2023 numbers given the quality and scale of the business. And If Pins is able to find success in creator-driven video content (either through more engagement or new business models), and/or Pins can become a shopping platform with either a take-rate/affiliate model (effectively getting investors to look at Pins on GMV basis), there could be positive change in perception.

            Qualitatively, people that like Pins seem to love it. It is a personalized and engaging platform that offers a respite from social media. This does not make it a great advertising platform necessarily, but it does create point of differentiation in the market. My sense is that Pins core utility to user is not perceived to broadly differentiated from other digital advertising businesses, and the macro events since Pins went public in 2019 have actually dominated (Covid-winner/Covid-loser/IOS scare) and shaped perception. The next few years are an opportunity for Pins to show that it can sustain user growth, expand APRU closer to peer levels, and hopefully evolve the use cases to create more frequent engagement.

            It is worth pointing out that Pins were rumored to be an acquisition target by MSFT and Paypal in the last year and half. My guess is that the ship has sailed on both of those deals given MSFT buying ATVI (though at $40B takeover/Pins is still only ~2% of MSFT market cap), and Paypal facing new challenges. Pins would be a good strategic target to a range of companies, especially if the lifestyle creator-driven publishing platform can take off. That would be another way for this investment to work out well from this price.

Catalyst

business improvement in 2023

sale

new initiatives drive user growth and engagement