Description

PINS was written up in VIC previously by sag301 in June of 2020. Please refer to the writeup for Company overview and history.

I love the economics of social media companies: Each social media company is relatively significantly different than of their competitors. From a user perspective, PINS has no competition. I expect for PINS to have high gross margins (80%+), and as the business grows there is significant operating leverage and potential for 40%+ EBITDA margins, generating significant FCF. As I previously state before on VIC, my fund is invested in FB, SNAP, TWTR. I believe PINS stock has the best shot to outperform the others.

What exactly is PINS?

It is a social media company designed to enable and save images in the form of pinboards. As of Q1’21 PINS has 478 million MAU (monthly active users), growing internationally at 37%, and US at 9%. International users represent 380 million of the 478 million users. This will be part of my thesis and why I believe PINS is misvalued by the market.

Who uses Pinterest?

About 75%+ of Pinterest users are female, and they use Pinterest for Purchase Inspiration. This part is absolutely key in the thesis. When you go to FB or TWTR, you don’t use those apps to see what to purchase, you use them for other reasons, and then you may get targeted ads.

Among the top uses of Pinterest you can find: Home renovation, furniture, decoration, travel, fashion, design, holidays decoration, food, wedding planning, beauty, arts and crafts, and pets.

I will offer a recent example. While decorating my office as we opened post covid, the interior decorators that we were working with asked me for an inspiration board. I went to Pinterest to see different styles of offices and added the stuff that I like how it looked and Pinterest helped me decorate my office. The dynamic here essentially was me telling pinterest: I want to purchase large ticket items, and then Pinterest has the ability to offer that product or a bunch of different products directly to me. What is that worth? A whole lot more than the $3.99 ARPU per user in the US, and easily over 10x more than the $0.26 internationally quarterly ARPU.

Why I believe PINS is misvalued/misunderstood?

I believe that PINS has a huge revenue growth rate. Essentially, revenue is determined by MAU x ARPU. What is interesting and unique about PINS, is that it is very popular internationally. MAUs are growing at 30%, but more importantly, they represent ~400m users or about 80% of the base. Now, these users are not in low GDP countries. PINS top 10 international user base come from Western Europe, Canada and Brazil. If you look at the delta between US and Europe in FB, you will see perhaps ~3x ARPU. There is no reason why for Pinterest it cannot be that number. Domestic ARPU is ~20x the international ARPU, and that is after International ARPU growing 91%, compared to 50% for the US. This catch up (to let’s say a 3x delta) will generate very very high revenues for PINS – especially because: a) the delta is so wide that it will last for several years, and 2) the international portion represent 80% of MAUs. As a reference International revenue is growing at 170%, compared to 65% in the US.

How high can ARPUs go?

This is a very tough question to answer, but we can look at Facebook for some reference, which is $50 ARPU and about $15 for Europe per quarter. What is impressive is that Facebook numbers are not slowing down much, growing at 20%+ YoY. So to compare, PINS numbers are 15x lower in ARPU in the US and ~50x lower in Europe/International.

Clearly FB has better software to track you around, though I find PINS very impressive for its size. But where PINS has a significant advantage is that I’m literally telling PINS what I want to buy. AND I LIKE AND WANT PINS TO GIVE ME SUGGESTIONS OF SIMILAR ITEMS AND PRESENT ME WITH DEALS!! This is why PINS MAUs are growing at a much faster rate.

I don’t know where the limit on ARPUs is. However, research we have done for FB is that marketing ROIs are still at over 100%. I think that the focus for the next 5-10 years for PINS will be how fast they will get to capturing more of the value that they offer – and how much do they have to spend on marketing to get there. As of now, PINS should try to be aggressive to try to get as many companies market on their platform. One aspect where Pinterest has done well is the Shop on Pinterest. For instance, in the search for my office, I get a Barcelona chair as a suggestion, and then I get the imitation no brands along with reviews and even some used versions by 1^st dibs.

Valuation

Admittedly, it is tough to pin down how to value a company whose growth exceeds 100%. I know that even among VIC members there are several different ideas on how a valuation analysis can and cannot be performed. However, I will offer how I believe this investment will make money.

1.- Perhaps most importantly I think that in the short term, because of the revenue dynamic, PINS should strongly beat revenue estimates. I think this is what will move the needle in the short term. Beat and rise.

2.- I expect margins to be similar to FB in about 5 years. Sure, FB will have greater operational leverage, but PINS does not have to worry about government / regulation issues.

3.- I expect revenue growth to be above 50%+ for the next 5 years. Big statement here - sell-side expects revenue to moderate to 32% in 2022. To get to my numbers here simply model MAUs growth x arpu growth – and as I said before model by geography.

Risks

Main risk here is execution risk. I think many investors will mention FB /GOOGL as a risk. I think that is not the case. FB /GOOGL have not been able to do a product that competes with them and Pinterest is too far ahead. From an integration standpoint, FB/GOOGL will most likely not interfere with PINS given it takes business away from them, but also they are under very high scrutiny around the world for being a monopoly.

Near term there is risk that comps will be tougher due to COVID. It is expected and management stated that usage went up abnormally during COVID. Another aspect is that more people decorated / spent money on their homes during the pandemic. The YoY is supposedly going to be tougher. With that said, I do expect strong ARPU growth on Q2 2021. Will the market focus more on MAUs?

This brings me to another point. I think there is a limit on MAUs for PINS and in the US, we are close to it. When you reach 33% of the population, that’s a lot of users. Some analysts will see this as a negative; I believe this means that they’ve captured the market, and it is then, when the business should focus on monetizing its product and increase ARPU. This was exactly why a lot of investors missed FB when it launched its IPO in 2012.

Catalyst

Revenue beat and raise guide