Pinterest Is A Deep Value

|
About: Pinterest, Inc. (PINS), Includes: FB, LYFT, SNAP, UBER
by: Jeremy Kruid
Summary

The IPO price provides a deep value relative to social media companies.

Pinterest is a pure play in social commerce.

Monetization is in its infancey.

Pinterest released its first IPO price range of $15-$17 per share. This gives Pinterest a valuation of roughly $9 Billion. While Pinterest operates a social web site, people share things to purchase, it is very dissimilar to the social media cohort. I believe that at the current valuation Pinterest looks like a good long-term opportunity as a growth stock.

Pinterest Represents a Value

I call Pinterest social commerce company. I say social commerce because people are sharing ideas of things to buy and what people are selling rather than ideas. Pinners, as they are called, share pictures with short descriptions. The pins are used to help people generate ideas from home décor to fashion accessories.

One of the great values of Pinterest is that it has no secondary businesses. This makes the balance sheet very clean and easy to understand. It is a pure play in the social game. Pinterest works hard on differentiating itself from the other social media companies, but if not for the social sharing aspect it would not be what it is. The value of people sharing or pinning the content that makes the company work.

The risks associated with Pinterest are interesting. They have all the same risks as any web-based business, but I see one being significantly reduced. The political risk of Pinterest is a lot better than that of a Facebook or Twitter. Since Pinterest does not have nearly as much emphasis on words, trolling and hate speech are almost non-existent.

Monetization

Pinterest has done very little monetization regarding paid pin placements. According to the S1 Pinterest only generates approximately $3 per monthly active user (based on $755 million in revenue and 250 million users). I think that the opportunity for Pinterest is not related to paid advertising but to ecommerce. I believe that paid pins will continue to exist, but the more exciting opportunity is for Pinterest to integrate a buy now button and take a percentage of sales.

I believe a major opportunity for Pinterest is to enable users to create pins with direct sales. Imagine you click on a pin you like, and it takes you to a checkout page instead of pinning it to a board. A user’s board would effectively turn into a shopping cart of things they want to buy. I believe that the ecommerce opportunity could be a game changer.

Pinterest presents products to consumers in a unique way. There is much more customization that allows sellers to differentiate their products from their competition. Pinterest could also integrate video pins. The combination of video pins and ecommerce would give every small business and individual crafter a mini QVC channel. I believe that $3 per monthly active user is just the beginning and will be multiplied over time.

Valuation

The growth possibilities that I have outlined makes Pinterest a good-looking opportunity. $9 Billion is a discount to a snap at about $16 Billion. Pinterest also boasts a 68% gross margin and positive cash flow. In 2018 Pinterest generated $51 Million in cash (according to the S1). This represents about a $61 Million improvement over the previous year. I believe that Pinterest could be profitable if it wanted. If they cut research and development or selling, general and administrative expenses they could easily break even.

Facebook maintains a valuation of about $513 Billion (as of April 10, 2019) on $55.3 Billion of revenue (as of December 31, 2018). This works out to 9.3 times revenue. Pinterest reported $755 Million of revenue at the end of 2018. Pinterest has a 68% gross margin and faster revenue growth. Using Facebook's revenue multiple Pinterest would have a valuation of about $7.021 Billion. Given the future growth opportunity, better gross margin, and lower political risk, I believe that Pinterest should get at least double the revenue multiple of Facebook. Now you end up at $14 Billion. This is a strong premium to the $9 Billion that has been proposed.

They are wisely investing in growth without burning through excessive amounts of cash. Unlike an Uber or Lyft, Pinterest is unlikely to need to raise cash in a dilutive fashion. This is a disciplined management team in a highly competitive market. They also have a differentiated product with opportunities to monetize in a very organic way without excessive ads that would drive away consumers.

The Pinterest IPO is very cheap and should be seriously considered as a long term hold for anyone that wants exposure to the future of ecommerce.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.