Pinterest: A GARP Story Worth Buying (NYSE:PINS)

Pinterest (NYSE:PINS) has performed well for shareholders in the past year with a 40% increase. As we can see above, since 2022, Pinterest has seen its P/S multiple below 10, and currently sits around a reasonable 8, with an estimated sales growth of 20% or a P/S growth ratio of 0.4, pretty much in line with similar social media platforms like Reddit (RDDT) and Snapchat (SNAP).

Pinterest reports on 7/30 with consensus analyst estimates of $0.28 EPS (32% higher YoY) and $848Mn revenues (20% higher YoY). In the last four years, Pinterest has beaten EPS estimates in 15 out of 16 quarters and revenue estimates 13/16 quarters. Quite good at sandbagging! Management guided to $835Mn to $850Mn in revenues.

Management also guided to EBITDA margins being higher than last year (22%) for the full year, during its call.

Earnings aside, what are the long-term prospects of Pinterest and how does it stack up with competition?

Carving its own niche

I believe Pinterest has held its own with so many other strong competitors, such as Facebook, TikTok, Reddit (RDDT) and Snapchat (SNAP) because it has a completely different focus and niche. Theirs’s is a unique and distinct space, unlike other social media platforms, which tend to focus on entertainment, while Pinterest zeroes in on forward commercial intent.

The majority of Pinterest users have an intent to buy, which is far more valuable to advertisers.

Pinterest has a Zen like quality about it, visually appealing, less toxic and less negative, a focused objective for its users, with no pressure on the number of followers or personal drama.

As a social media user, I see and understand that while social media platforms will overlap, no single platform can fulfill everything, not even the mighty Facebook. When platforms like Pinterest have certain skill sets, such as fulfilling idea needs or visually augmenting design ideas, they are filling a competitive void. As such, this is a huge competitive advantage and should remain so, for two reasons – one is the skill set, the second is the network effect or the flywheel. From Pinterest’s 10K, emphasis mine.

Design and product ideas come from a variety of sources including retailers, brands, creators, publishers and users. Content formats include images that allow you to click into an idea to learn more, videos that provide the steps of an idea, and products that brands and merchants upload from catalogs.

Our users often come to the platform to get inspiration for many of life’s moments, which can lead to discovering new products and brands. As a result, commercial content from brands, retailers and advertisers is central to Pinterest. We believe that in-market consumers on Pinterest tend to be early in their journey toward a purchase decision and do not yet know exactly what they want to purchase. Accordingly, we believe that they are open to discovering new products and brands on Pinterest rather than merely navigating to brands they already know, as is common on traditional search engines and e-commerce platforms. This creates a unique flywheel where relevant ads can not only enhance the user experience, but also drive more value for advertisers in the form of increased views, clicks, and conversions.

Women comprise 2/3 thirds of Pinterest’s user base and Gen Z over 40%; Gen Z is also the fastest growing cohort. Anecdotally, while speaking to users, I learnt most were happy going there because it helped them with design ideas and helped them with the process of choosing a few things.

Why would the supply side (brands, retailers, and advertisers), switch or flock to Facebook, Instagram or TikTok when they have 480Mn Monthly Active Users completing the creative, and monetization process? Similarly, why would users waste time on Facebook, Instagram and TikTok for products they won’t find, which are available in droves on Pinterest.

I believe this unique identity and niche is a big competitive advantage, similar to the one Reddit enjoys with its Subreddits, and TikTok enjoys with its influencers. I believe this strength will continue to help it grow and compel users to stay loyal.

Monetization Initiatives

Pinterest’s funnel execution has to be spot on, basically easier and faster monetization, which initially it was unable to do with far too much wastage on creativity or design help; simply, there weren’t enough deep links to sell. With a user intending to buy, they needed more direct links from sellers.

They started improving on this from 2023 and have been executing better with more click throughs served and converted in Q1-24. 97% of lower funnel revenue adopted direct links in Q1-2024

Secondly, their API initiative has also yielded better results with API for conversion covering 40% of revenue in Q1-24. Management also cited that they have seen their budget share of sellers, increase as a result of performance, with double the number of clicks in Q4-23 and Q1-24. This was more pronounced with larger and more sophisticated sellers, who are measuring performance better.

While Pinterest has third party advertisers such as Google and Amazon also increasing revenue, they were more impressed with their own direct initiatives in contributing to revenue growth in Q1-24.

Good financial performance in the past 6 years

Pinterest has grown at a great revenue CAGR of 36% from a paltry $473Mn in 2017 to a high $3Bn business last year with 480 Monthly Active Users. Cash Flow was also strong for the last three years, with margins of 29, 17 and 20%.

Weaknesses

Concentration

Pinterest is concentrated in two areas – CPG (Consumer Packaged Goods) and Retail, which could be a dampener to growth.

Stalling growth and poor ARPUs

US Monthly Active Users had stalled at 97Mn users in 2023, it was 95Mn in 2021, barely growing to 98Mn in Q1-24.

Europe had grown from 122Mn to 135Mn in 2023 a 5% annual growth, which increased to 9% growth in Q1-24.

But the only real growth in the last 2 years has come from the Rest of the World from 215 to 266, an 11% annual increase further growing by 16% YoY in Q1-24.

We can see that in the ARPUs as well, annualized increases were 6% each for North America and Europe, while ARPU for the rest of the world jumped 17%. In Q1-24, Pinterest had a much better YoY growth rate with North America and Europe outpacing the rest of the world at 18% and 16% compared to 10%.

However, the Rest of the World’s ARPU was a measly 15 cents compared to $1.23 for Europe and $8.07 for North America, which means overall ARPU will not increase easily and will be weighed down with lower ARPU’s from the rest of the world.

I had highlighted the same problem of lower ARPUs and weakness of smaller players fighting for scraps in my Reddit article. Reddit’s US ARPU is just $4.8, Snapchat’s is $8.96, whereas Facebook’s is $68.4. This facet of the social media industry doesn’t augur well for smaller players like Pinterest.

No Pricing Power

In 2023, even as the number of ads increased by 31%, the price per ad dropped as much as 17%. Similarly, in Q1-24 the number of ads served increased by a whopping 38%, but prices dropped 11%.

Valuation – Recommending a buy

1. Q2-2024 results are expected on July 30th and there are a few key factors to look out for.

   1. Management was very clear to not expect hockey stick moments for any quarter; they believe that the measures for greater conversion such as increased use of APIs and direct link capture operate with a lag. As I mentioned earlier, some initiatives started in Q4-23 started accelerating in Q1-24 and these will continue in Q2-24 as well.
   2. Increase in seller’s budget share, which comes only as a result of performance. That should also show up in Q2 earnings and be scrutinized thoroughly.
   3. Management guided to better adjusted EBITDA margin for 2024, which was 22% for the whole year of 2023. When questioned about AI and R&D spend, like everyone else, they too are spending on it, and have cautioned to expect headcount increases. A few days back, Alphabet (GOOG) got burnt for not showing enough AI revenue or even AI related revenue. I am a long-term investor, and I can understand that you cannot produce monetizable AI without spending on it, but who knows how impatient traders can be if expenses turn out to be higher?

I expect Pinterest to grow revenue at a CAGR of 17% from 2023 to 2027, with a good jump of 20% in 2024, gradually growing at 17-14% in the next three years, fueled by a steady increase in direct link sales and conversions. The margins are quite impressive with cash flow at 20%, and adjusted EBITDA at 22%. As margins improve, EPS is slated to grow much faster from $1.09 in 2023 to $2.67, or over 25% a year, this is not just a sales growth story and I would have hesitated to buy just a 17% grower at 7x sales, but great cash flow and earnings definitely tilted it towards a buy.

Pinterest stacks up well compared to Snapchat and Reddit. While Reddit grows revenues faster at 22%, it has no profits to speak of, and a much lower ARPU and growth, but is priced similar at a P/S growth of 0.45 to Pinterest’s 0.43

Snapchat, on the other hand, is growing revenues slower at 14%, and priced lower at a P/S growth of 0.29.

More than the numbers, I like…

• The unique website and platform with its niche of helping buyers with ideas and design.
• The intent to buy valuable user base.
• The flywheel, which no other platform can easily replicate.
• The drive toward better monetization.

These are all big pluses, making it a good GARP (Growth at A Reasonable Price) story. I’m putting in an order to buy.