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Investors that choose to invest in Pinterest (NYSE: PINS) are betting that the company has developed a far more effective and desirable way of both advertising and selling products than any other form of digital advertising. Pinterest uses a type of advertising called native advertising, which is a way to show consumers the products and services that they most desire without being considered overly intrusive. This contrasts to social networks like Facebook (NASDAQ: FB), search websites like Google (NASDAQ: GOOGL), and video platforms like YouTube, which tend to either force unwanted ads down consumer’s throats or give users a creepy feeling of being digitally tracked.
A secondary effect of how Pinterest has designed its platform is that major brands often prefer advertising on Pinterest over other digital advertising formats because Pinterest’s native ad platform is viewed as brand safe, meaning that it is far harder for brands to become associated with unsavory topics that might tarnish the brand on Pinterest versus all of the rest of the advertising platforms on the internet, many of which have already gotten in trouble with brands.
The desirability of native advertising from both a consumer and advertiser point of view sets Pinterest up for long runway of growth and profitability. When Pinterest’s long-term growth potential and increasing profitability is combined with a very favorable valuation after the recent big pullback in stock price over the course of 2021, the company has become one of the better companies for long-term growth investors to buy.
Data by YCharts
How Pinterest Works
What Pinterest essentially does is connect users to both ideas and the creators behind those ideas. For instance, if people want ideas on how to decorate their home or they want different ideas on where to go on vacation or ideas for weddings, then Pinterest is an interesting place to conduct either a text or visual search to connect to those ideas. The ideas on Pinterest come in the form of what the company calls “Pins”, which are simply placeholders for an idea that is usually shown in the form of an image but is now increasingly being shown in the form of a video. When a person likes a “Pin” idea, they can save that idea that they are most interested in by pressing a save button. When people click on any of the Pins on the platform, then it will bring up more information about both the Pin itself and the content creator behind the creation of the Pin. Sometimes, the content creator is just an individual that is simply a hobbyist posting things of interest to other fellow hobbyists but in some instances the Pin poster might be a content creator or publisher representing a business posting native content.
Pinterest has built up a large set of publishing tools specifically designed for the creation of native content. In 2021, Pinterest pushed its publishing tools into 37 different markets and launched 150 new features, many of which were released this past October. One of the biggest features released is a ‘Watch’ mode which is very similar in design to a TikTok video presentation and yes, the people at Pinterest have noticed the rise of TikTok and considers the company a strong competitor for every internet user’s attention. Over the past several years, Pinterest has started to increasingly develop publisher tools to add short-form video content to target the increasing consumer demand for the types of content appearing on TikTok and Meta Platforms’ (NASDAQ: FB) property Instagram.
Native Advertising
Pinterest might be the ultimate platform for native advertising because the platform is full of people conducting searches for ideas that people often want to make into a reality. In 2014, Pinterest launched a feature called Promoted Pins, which essentially allows individuals or companies to promote their “Pin” by targeting users who are actively searching for an idea that the Pin represents. Usually, an individual or company that uses Promoted Pins can provide the exact product/service to the user interested in that specific idea. If a user chooses to click the Pin, then often the user can find more information that can help them turn that idea into reality. This often results in a high-quality sale for the advertiser, as Pinterest is very well known for having the highest conversion rates and driving the highest value conversions.
A simple example is if I am interested in buying a fashionable coat and I want search out different ideas for a fashionable coat, then I can do that search on Pinterest and I will be presented with many different Pins with pictures of coats. I can choose the coat I like by clicking the Pin and then all types of information will appear, including the cost to buy the coat and links to the website where the coat is sold.
Search For Coat on Pinterest (Pinterest)
Pinterest has also developed several enhancements to the Promoted Pin idea that make the ad product even more effective. These enhancements include:
- Rich Pins – There are 6 types of Rich Pins that are outlined here.
- Video formats – This allows advertisers to promote video Pins.
- Placement targeting – This will let advertisers specify where they want the ads to appear on Pinterest.
One of the things that I look at as an investor to help determine how effective a company is as an advertiser is to look at a metric called Average revenue per unit (ARPU), which is a metric that measures how effective a business is monetizing its users. Generally, whenever websites or media outlets primarily use advertising to monetize its users, the ARPU number will often serve as a proxy for how desirable advertisers find the media outlet for placing its ads. When investors see ARPU moving up and to the right for a media company, that is a good thing and indicates that the media company is becoming a far more desirable place to advertise. A rising ARPU is associated with a company being able to charge higher prices for ads over time, which roughly translates to a rising stock price over the long-term because it indicates that the company has pricing power to gain more advertising revenue per user. Investors often reward companies that have pricing power.
Pinterest ARPU (Pinterest Q4 2021 Shareholder Letter)
Pinterest Ecommerce Activities
Pinterest transformed from just a search and discovery site into an ecommerce site about 5 years ago with the introduction of Buyable Pins, which allows people or companies to sell items directly on the Pinterest platform without having to leave the platform. Buyable Pins can be a very effective form of selling because it eliminates friction to the sale by getting rid of the extra step of clicking to go to another website. Buyable Pins can be identified by a blue price and an “Add to Bag” button that has the ability to add the item to a user’s shopping bag.
Pinterest has been leaning very heavily into the shopping idea with the end goal of building out a differentiated experience from other ecommerce sites. Now that the company has gotten very active with video, the potential upside for Pinterest is enormous in the ecommerce arena. The company has great potential to build out an internet version of the Home Shopping Network from its fledgling Pinterest TV concept. Competitors like Instagram and TikTok, while in the process of building out ecommerce activities, seem more focused on using short-form videos for more entertainment and news purposes. While some potential Pinterest investors might fear TikTok as a competitor, it should be remembered that TikTok probably doesn’t have as much of a laser focus to become as effective at building out a native advertising and ecommerce platform on the level that Pinterest can. Advertising and ecommerce is the side where Pinterest’s bread is buttered.
Pinterest has also started to experiment with some very interesting ideas for ecommerce outside of video too. One of the relatively recent areas of heavy investment by Pinterest is in Augmented Reality. Recently, Pinterest introduced several AR products with the launch of Try On for beauty in 2020 and Try On for Home Decor this year. I would also not be surprised if Pinterest is heavily investigating concepts like VR, the metaverse and NFTs too.
Pinterest Buy It (Pinterest Website)
TwoTwenty: Pinterest’s Innovation Lab
Currently, there are very real worries that Pinterest will be unable to compete with TikTok. While on the surface Pinterest doesn’t appear to be all that innovative, the reality is quite different. Pinterest is one of the more innovative companies in the market. In late 2021, Pinterest introduced the world to TwoTwenty, which is an innovation incubator team living inside of Pinterest that I assume was formally established only relatively recently to experiment with all types of different ideas that are submitted from people within the company.
This appears to be where a lot of the R&D dollars are going in an effort to battle not only TikTok but Instagram, as well. People that invest in Pinterest are essentially betting that this focus on innovation will pay off down the road with more users, rising engagement levels, more ad revenue and the ability to become established as a strong ecommerce platform. Fast Company recently wrote a very interesting article here that dives very deeply into TwoTwenty that made me more comfortable about owning Pinterest’s stock over the longer term.
Pinterest Q4 2021 Earnings Report
Pinterest MAUs (Pinterest Q4 2021 Shareholder Letter)
First let’s look at why investors are concerned about Pinterest’s latest quarter. Many people consider Pinterest a social network and the name of the game for social networks is user engagement, which can be measured in Monthly Active Users (MAUs) or in Daily Active Users (DAUs) and the companies that show the most confidence in their engagement numbers will usually highlight both DAUs and MAUs. Pinterest is not currently that confident. Pinterest only highlights MAUs and that number has dropped from 2020 to 2021. Pinterest’s global MAUs decreased 6% year over year to 431 million. Pinterest’s U.S. monthly active users dipped 12% year-over-year to 86 million. The reasons Pinterest gave for the MAU decline were that the recovery from the pandemic caused users to seek out other activities, the time users spent on other competing video app platforms like Tik Tok has increased and last but not least, lower search traffic from Google dropped its engagement numbers. Apparently, Google has changed their search algorithms, which had a significant impact on Pinterest and from what was said on the conference call might have a longer-term impact than the consequences from the COVID-19 recovery.
Our monthly active users were negatively impacted from lower search traffic due to Google’s November algorithm updates. In fact, more than half of the Q3 to Q4 sequential decline in U.S. monthly active users was attributable to Google’s algorithm update starting in mid-November. We’re examining the overall impact from recent search algorithm changes as it appears to be more persistent than we’ve seen historically. Our teams are working diligently to understand this, but it may take some time.
Source: CFO Todd Morgenfeld – Pinterest Q4 2021 Earnings Results
Pinterest Revenue (Pinterest Q4 2021 Shareholders Letter)
Pinterest total revenue was $847 million in Q4 2021, an increase of 20% year over year. Pinterest revenues beat analyst expectations by $19.43M. Revenues have been impacted negatively by after effects from the pandemic, namely supply chain woes affecting Consumer Packaged Goods companies, which has the knock-on effect of lower advertising spend on platforms like Pinterest. On the positive side, Pinterest saw strength from retail advertisers and international advertisers. So, there is some potential upside to revenue growth for Pinterest as eventually Consumer Packaged Goods advertising spend should rebound.
Pinterest Expenses (Pinterest Q4 2021 Shareholder Letter)
Pinterest GAAP cost of revenue was $141 million or 17% of revenue, down from 18% in the same quarter in 2020. Pinterest management highlighted that lower infrastructure costs were responsible for the decrease in cost of revenues in the earnings call.
Data by YCharts
Pinterest GAAP Gross Profits and Gross Margins were $705.41 million and 83.32%, respectively. Operating margins on a GAAP basis was 21%.
Data by YCharts
Pinterest non-GAAP expenses (Pinterest Q4 2021 Shareholder Letter)
There are many tech companies that also like reporting non-GAAP numbers because many companies feel that it gives a better indication of the operating results of the company because non-GAAP numbers eliminate non-recurring expenses. Some of the differences in Q4 between Pinterest’s GAAP and non-GAAP operating expenses was the result of a one-time $49 million stock-based compensation expense that took place in Q4 because of Pinterest founder Evan Sharp leaving the company. This expense was included in GAAP R&D expenses. There was also a $25 million non-cash charitable contribution that was included in Q4 GAAP G&A expenses.
For both GAAP and non-GAAP numbers, increased hiring led to the rise in R&D expenses. S&M expenses also rose on both a GAAP and non-GAAP basis because the company decided to resume its brand marketing campaign in Q4. S&M expenses also rose because of the company hiring more people in marketing. As the pandemic winds down and with competition ramping up it appears Pinterest is turning to ramping up spending in both R&D and in marketing.
Pinterest Net Income from 2019 (Pinterest Q4 2021 Shareholder Letter)
Pinterest Net Income (Pinterest Q4 2021 Shareholder Letter)
Pinterest is coming off its first year of full year profitability in 2021. Pinterest Q4 2021 net income was $175 million with a net margin of 21%, compared to net income of $208 million with a net margin of 29% in the year ago period. Non-GAAP net income was $339 million with a net margin of 40%, compared to $294 million with a 42% net margin in the year ago period.
Pinterest Earnings Surprise (Seeking Alpha)
Pinterest Q4 Non-GAAP EPS of $0.49 beats analyst consensus EPS of $0.49 by $0.03.
Pinterest EBITDA (Pinterest Q4 2021 Shareholder Letter)
Pinterest adjusted EBITDA was $351 million for a 41% EBITDA margin, compared to the year-ago quarter adjusted EBITDA of $299 million for a 42% EBITDA margin
Pinterest Guidance
Pinterest Guidance (Pinterest Q4 2021 Shareholder Letter)
As can be seen in the above Pinterest commentary in the graphic, Pinterest projects Q1 revenue to grow in the high teens percentage range year over year. This is versus average analyst expectations of revenue growth of 18% to $572.7 million for Q1 2022.
In general, the company did better than Wall Street expected, even though there is still concern about MAUs weakening. That concern is countered by a rising ARPU, which generally helps the stocks of social networks and media companies like Pinterest rise over the long-term.
The negative impact of the COVID-19 recovery will eventually go away soon and leave two things to watch for with this company. The first thing to watch for is competition from companies like TikTok and Instagram. The last time TikTok reported MAUs, they had topped 1 billion in September of 2021. If TikTok MAUs continue to rise, while Pinterest MAUs continue to tail off, then that will not be a good thing and Pinterest’s stock will likely sell off. Among the reasons why Pinterest indicates that they are ramping up expenses in their guidance is they really need to compete better with TikTok and Instagram in the short form video format by building out a video product with more and better features. The evidence that the investments to build out new features are starting to work, however, is that CEO Ben Silbermann stated in the Q4 earnings call that the company is already starting to see results that show better engagement metrics but these results are very early and progress must continue for investors to get excited.
This supports our hypothesis that our investments in native content can be engagement accretive over time. We believe that with sustained investment, we will see these trends grow as more and more Pinners find and follow creators they love.
Source: CEO Ben Silbermann – Pinterest Q4 2021 Earnings Results
The second thing to watch is that Pinterest seems very reliant on Google Search for exposure and Google has appeared to change their algorithms in a manner in which has lowered Pinterest’s MAUs. Pinterest must figure out a way to circumvent that problem.
Balance Sheet
Data by YCharts
Data by YCharts
Pinterest currently has an excellent balance sheet and cash flows to support growth.
Analyst Price Targets
Pinterest Analyst Price Targets (Yahoo Finance)
The above is based on 30 Wall Street analysts offering 12-month price targets for Pinterest in the last 3 months. The average price target is $46.53 with a high forecast of $83.00 and a low forecast of $22.00. The average price target represents a 76% increase from the last price of $26.46.
Valuation
Data by YCharts
Although Pinterest would be considered very highly valued based upon a PE basis, I consider Pinterest at too early a stage to value the company properly on a PE basis, as the company has only recently become profitable. I tend to still use the PS ratio with Pinterest because I consider the company as still being in a heavy innovation and investment mode. Since Pinterest has come public the highest PS ratio has been 30.57 and the lowest has been 5.37, according to Gurufocus. Right now, Pinterest has a PS ratio of 6.93, which is far closer to lows than it is to highs. The stock has been beaten down by the general fall in tech companies, concerns about MAU growth, concerns about Apple’s IDFA change impact on advertising, and concerns about rising competition from companies like TikTok.
Conclusion
Pinterest is a somewhat speculative company and what investors in the company are betting on is that management’s investments in areas like shopping and short form video pays off in the manifestation of more users, as well as increasing engagement. Even after the 11% stock rise after earnings, the stock is currently at a valuation where the risk vs reward is favorable for long-term investors. Pinterest is a stock that requires patience, however, as there are no near-term catalysts that will send the stock up in the near-term and it could possibly take well over a year or two for the investments being made today to fully turn the situation around back to steadily rising MAUs. Investors can make an initial buy at the current price and buy more on any pullback.
Source: https://seekingalpha.com/article/4485417-pinterest-profit-from-rise-native-advertising
