(Here is the completed equity research)
Pinterest Business Overview
Pinterest is an American image sharing engine and social media service designed to enable saving and discovery of information (specifically “ideas”), using images, GIFs and videos in the form of Pinboards. Pinterest is created to solve people’s daily problems: lacking creativity.
Financial Overview
Industry Overview: Global advertising market
According to IDC, the global advertising market is projected to grow to $826 billion in 2022 from $693 billion in 2018, representing a 5% compound annual growth rate (“CAGR”). The digital advertising market alone is projected to grow to $423 billion in 2022 from $272 billion in 2018, representing a 12% CAGR. Digital advertising market will become more important as social commerce and User-Generated Content keep expanding. Consequently, as a emerging digital advertising giant, Pinterest will benefit from these trends.
Key metrics
Revenues
Pinterest generates revenue by building ads into its website and app. The ad creatives (i.e., the visuals) are displayed as a Pin (on Pinterest, all images are called a “Pin”). Typically, the user is taken to the business’ site when they click an advertising (ad) Pin. Pinterest segments its revenue by geography. Monetization efforts first started in the US, which has a mature digital advertising market.
Pinterest has experienced significant growth over the last several years. For the year ended December 31, 2018, Pinterest generated revenue of $755.9 million, as compared to $472.9 million for the same period in 2017, representing year-over-year growth of 60%.
MAUs
Pinterest uses metrics like monthly active users (MAUs) to measure its user base. At the end of second-quarter 2020, MAUs were 416 million. While United States MAUs increased 13% to 96 million, international MAUs increased 49% to 321 million.
MAUs Global (total) increased 39% to 416 million. Users who began engaging in Pinterest during COVID-19 continued to have high levels of engagement even after shelter-in-place restrictions were eased in the reported quarter.
Average Revenue Per User (“ARPU”)
Pinterest presents ARPU on the U.S. and international basis because Pinterest currently monetizes users in different geographies at different average rates. U.S. ARPU is higher primarily because of their decision to focus on earliest monetization efforts and the relative size, maturity of the U.S. digital advertising market.
Though the average revenue per user (ARPU) Global decreased 21% to 70 cents, this contraction in global APRU was driven by the increase in International MAUs and a decrease in advertising demand due to the COVID-19 pandemic.
Spotlights, Reason to buy
Rapid Growing MAUs: Pinterest shares pop 26.8% after Q2 statements coming out, which beat the expectation that came with a 39% Y/Y growth in global monthly active users to $416M. Pinterest has been benefiting from its growing popularity among teenagers (GenZ) driven by the diverse content that the platform provides, growing adoption of its advertising platform and efforts to improve user engagement.
Potential revenue from other countries: As we can see, most of the revenue is from US region, because Pinterest’ efforts on early development and cultivation of shopping habit in US are successful. Pinterest has lots of MAUs all over the world, but these Pinners still can’t be monetized before Pinterest launch the Promotion projects for advertisers in those regions. That is to say, if the user base in specific region is not large enough, Pinterest will not try to launch the projects to monetize. They want to seize every opportunities carefully.
Strong balance sheet: Pinterest has a strong balance sheet and generates positive cash flow since 2018, which makes it an attractive stock for investors. The company has cash and cash equivalents (including marketable securities) worth $1.7 billion as of Jun 30, 2020. Moreover, it has no financial debt and an undrawn $500 million revolving credit facility. Pinterest’s strong liquidity position will enable it to make further investments in product development and acquisitions in the future.
Unique value proposition and ads channel for SMEs: Pinterest is increasingly establishing a unique value prop to advertisers that could provide a competitive advantage in the long haul. Through various innovations, Pinterest continues to dramatically improve its advertising platform, which is presently one of the best ad platforms for consumer brands looking for new ways to reach customers and stretch smaller ad budgets. Pinterest’s Verified Merchants Program allows brands to create a catalog of shoppable products on the app and use distinctive re-targeting capabilities in their ads. For the users of Pinterest, it is a different searching engine from Google; it is a mixed social media from Facebook. Pinterest is also catching a tailwind from Facebook’s Q2 beats. The company stands to benefit from its internal improvements and its ability to exploit Facebook (FB) boycott.
Risk factors
Third-party sign-on tools and search engines: Pinterest is still subject to restrictions. Most users will not visit the platform every day, leading to huge challenges in the development of the advertising business, especially the partnership with Google and Facebook. Pinterest allows users to use the authentication services of Facebook and Google. User activity relies on the support of Google search services and Facebook. Also, the algorithm from Facebook and Google can influence the user traffic of Pinterest. Furthermore. competition is furious, from online to offline advertisement to all social media that will take users’ time.
International MAUs are not as profitable as MAUs in US: As APRU indicated below, Although over 3 millions are from other countries, they only contribute little revenue for Pinterest. First is because the shopping habit is different. Second is about the late launch of advertising program: Pinterest is still accumulating larger user-base to monetize these Pinners. However, if the revenue from international users are still unprofitable, it will be a huge burden because of the cost and expense to maintain these users.
Insider selling: Both of the founders and board directors are selling their share over half the year.
Valuation
For the estimated revenue, I split two parts because of impact from Coivd-19. The probability of the economic recovery would influence the revenue performance.
Hypothesis 1, Sales revenue in 2020/12/31 by weight average
(Assumption before COVID-19)
According to Pinterest 10K, Pinterest annually revenue growth rate from 2016 to 2019 is 52%, 59%, 58% separately. The MAUs growth supports revenue growth; we can also see the tremendous growth of MAUs, 32% annually on average, which can help the estimated revenue growth of revenue.
Because of the steady growth pattern of history MAUs and revenue, I would believe the revenue growth rate can reach (58%*3+59%*2+52%*1) / 6 = 57.3%, weight average of these three years. As a result, the revenue of 2020 will be (1+57.3%) * 1,142.8M (2019 revenue) = 1,797.9M
Hypothesis 2, Sales revenue in 2020/12/31
(Assumption after COVID-19)
I separate the Revenue, MAUs, ARPU by two regions: the US and international countries. According to 10-Q, the Revenue and MAUs are highly correlated, 86% for the US and 91% for international countries, so I estimate the revenue by the growing MAUs multiplying growing ARPU.
How do my assumption made?
- From 2016 Q1 to 2020 Q2, US MAUs quarterly growth rate is 2% (from 65 M to 96 M)
- From 2016 Q1 to 2020 Q2, International MAUs quarterly growth rate is 9.98% (from 63 M to 321 M)
- From 2018 Q3 to 2020 Q2, average US ARPU is 2.83
- From 2018 Q3 to 2020 Q2, average international ARPU is 0.12
- From 2018 Q3 to 2020 Q2, average US ARPU quarterly growth rate is 10.86%
- From 2018 Q3 to 2020 Q2, average international ARPU quarterly growth rate is 26.49%
As a result, estimated revenue in 2020 Q4 will be 1,324M from hypothesis 2
So I do the weighted average of Hypothesis 1 and 2 based on the Covid-19 economic recovery probability. I believe the probability of economic comeback would be 67% The final estimated 2020 revenue would be (1,324.8M +1,797.9M * 2) / 3 = 1,639.86
Hypothesis 3, PS Ratio in 2020/12/31
Benchmarks
PS Ratio of 08/ 19 / 2020 & 7 Quarters after IPO
Twitter (9.261 + 6.8) / 2 = 8.03
Snap Inc (16.06 + 12.5) / 2 = 14.3
Facebook (10.04 + 14) / 2 = 12.02
Average 11.45
Pinterest History PS Ratio Range, Past 7 quarters
Minimum 4.990 (Mar 18, 2020)
Maximum 20.27 (Apr 29, 2019)
Average 12.07
Benchmarks and Pinterest history Average = 11.76
Target price
Pinterest projected share price after five months, 2020/12/31 should be 11.76 * 1,639.86 / 586.7 (Outstanding Shares — 2020 Q2) = 38.86 USD
Conclusion
Pinterest is a fast-growing company; it has lots of spotlights: strong fundamentals, partnerships with other platforms, and a high growth pattern. However, the price is too high, leading to an incredible PS-Ratio; the market gives too much pressure on its growth expectation. Furthermore, the large volume of insider selling is also the key reason investors should not buy. My suggestion is to hold. If investors had Pinterest shares recently, they should hold it and wait for Pinterest’s next big issue.
