With Pinterest stock being up +20% AH after reporting anything but impressive earnings, one has to consider this is THE bottom... the bottom where bad news is good news... the bottom that we should be fishing for (lol)... maybe.
I'm going to assume you don't use Pinterest... I don't recall seeing any 35+ year old females in my analytics. So, let's quickly talk about what Pinterest does and how it makes money.
Pinterest is a social media platform.
Think of it like a virtual "scrapbook". A place where you can "pin" your ideas and inspirations for various categories – home décor, recipes, fashion, etc. Given the popular categories/interest, you can easily guess the demographics.
User Journey & Monetization
1) Build a profile, using the mobile or web app.
2) Discover ideas.
3) Create Pins.
4) Save, share, and shop Pins. This is where business *enter the chat*... where they can advertise, and Pinterest earns revenue. Promoted Pins can be regular Pins, video Pins, and/or story Pins which either either shoppable, used to direct website traffic or app installs. From an advertiser's perspective, these can be used for both direct response and brand awareness.
Key Performance Indicators
Since it's launch in 2010 (12 years ago) it's now grown to over 430M monthly active users (MAUs) with revenues of +$2.5bn.
Obviously a drop in the bucket compared to Meta's nearly $120bn in revenues, but about 17% of Meta's nearly 3bn MAUs. So, what does that tell you? Pinterest has a monetization problem – just like Snap, just like Twitter.
I'm not going to use this as an opportunity to pump my Meta bags, but I have to say there is a clear statement to be made here. No platform is even CLOSE to Facebook for advertisers, so that shouldn't be our benchmark – but it does help build an understanding of potential.
Valuation & Analysis
As a reminder, all valuation sheets are available to premium members of The Hawk Letter and Discord. I highly recommend you join, to make your own assumptions and investment thesis :)
As with all social platforms or apps, we want to look at the non-financial KPIs monthly active users (MAUs) to assess user growth and average revenue per user (ARPU) to assess monetization. In the case of Pinterest, you can see they've grown users fast during the pandemic as people were staying home and working from home. However, user growth has not only stagnated but also decreased YoY in 2021. This is a HUGE red flag. Pinterest isn't doing enough, like Snapchat, to get outside its current demographic. That will always be a challenge, but Pinterest also has opportunity for international expansion. In any case, I am not willing to assume more than 5% user growth in my model.
ARPU is a clear area of opportunity, which thankfully they have still been improving on. The biggest area for Pinterest to grow revenues will be making it more of a platform for search as well of shopping. Think Google meets Shopify (or eBay). This is the real opportunity for Pinterest. This is also why I suspect Elliot Management has become the largest activist shareholder, who coincidently holds a position in PayPal. I believe they are working on a potential synergy here, which they're looking to exploit in the short-term. However, I generally take a longer-term outlook with my investments.
The margins in 2022 have been squeezed, and this is an area of concern of mine. I am hoping this is "transitory" and they can actually achieve a closer to the margins they had during 2020-2021. I believe this is possible, and that's what the new management will work on. However, for the purposes of my model (and conservatism) I'm assuming 4% net income margins – but, I honestly think they can do better.
Putting everything into a DCF valuation, I get a FV/share of $50 – which is aligned with Street estimates, and represents a +150% upside. Normalized FCF and P/S ratio of 7x would also indicate upsides to that degree.
However, my main area of concern, remains earnings margins – which needs to improve. For that, I am reducing my price target to $40 – which still represents a 100% upside.
- The biggest upside imo is increase in ARPU, which should come with additional features focusing on shopping and e-commerce. However, this is a challenge that Facebook and Instagram are still working on... neither have given Shopify a run for it's money. So, it's important to keep this in mind. There's a chance that users, simply do not want to integrate social media and shopping.
- Macro headwinds continue to exist for the advertising industry as a whole right now, as companies pull back on ad spend. Keep this mind with your allocation.
- Pinterest is no longer founder-led. There are countless studies showing founder-led companies tend to outperform their peers. It's not a surprise to me, but can Pinterest be an outlier? Who is Bill Ready, their new CEO? As former President of Commerce with Google, he probably has something to offer. He's also been at PayPal as COO.
The PayPal links are getting quite interesting or intriguing. I would say there is a chance Pinterest becomes an acquisition target, given the founder is longer involved. The pieces seem to be falling together – which is why I believe this can represent an opportunity to fish the bottom of this stock.
I am considering a long position here, however I do have enough adtech exposure with Facebook. I am considering a long position in Shopify, and I already have one with PayPal. So, I just want to keep these allocations in mind, and how they can potentially have me exposed. I would encourage you to do the same.
Basically, I have my eyes on PINS 📌👀
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