Pinterest: Pivoting To eCommerce Advertising Will Drive Growth In The Long Run

Jul. 10, 2020 5:06 AM ETPinterest, Inc. (PINS)7 Comments15 Likes

Summary

  • While Pinterest trades at a price-to-sales ratio of 12x, we believe that its current price is justifiable, as the company's revenues in Q1 alone increased by 35% Y/Y.
  • By pivoting to the eCommerce advertising business, the company will be able to leverage its unique audience and become profitable in the foreseeable future.
  • We’re long Pinterest.

After hitting its bottom in late March, Pinterest (PINS) stock has been steadily appreciating since then, and the current price is now above its last year’s IPO price. While the company’s loss widened in the first quarter of the year in comparison to the same period last year, we believe that Pinterest is a solid growth play with a unique positioning and a highly monetizable user base. By pivoting to the eCommerce advertising business, the company will be able to drive growth in years to come, as its audience continues to increase at double-digit rates and there are several untapped opportunities which Pinterest will utilize. While the company trades at a price-to-sales ratio of 12x, we believe that its current price is justifiable, as its revenues in Q1 alone increased by 35% Y/Y and are expected to grow at a similar rate for the next couple of years. With $1.7 billion in cash and less than $200 million in debt, Pinterest will be able to continue to expand and become profitable later on. For that reason, we decided to open a long position in the stock and have no plans to sell it anytime soon.

The Path to Profitability

Pinterest gives its users the ability to pin pictures or use the "board" feature to save a collection of pictures that they like. While the picture itself remains on the Pinterest platform, when clicked on it, it leads users to an article, a blog, or an online shop to which that picture is linked. In a way, Pinterest acts as a search engine that aggregates data in the form of images and connects users to specific, niche websites.

In Q1, Pinterest was able to increase its revenues by 35% Y/Y to $272 million, but its net loss widened. As COVID-19 started to spread outside of China, the company’s advertising business began to suffer immense losses and, as a result, its EBITDA for the period was -$53 million, down 38% Y/Y. Nevertheless, we believe that the earnings decline is temporary, and there’s every reason to believe that the company will eventually become profitable later on.

Pinterest stock price

Chart Source: Seeking Alpha

While Pinterest trades at a price-to-sales ratio of 12x, we don’t think that the company is overvalued. Tech businesses are known for their rich valuations, and generally, they trade much higher in comparison to companies from other industries. In the case of Pinterest, we believe that its current price is justifiable, since the company has a highly monetizable audience that continues to grow annually at double-digit rates. At the end of Q1, Pinterest had more than 350 million monthly average users, out of which more than 70% were women. In addition, more than 40% use Pinterest’s platform for shopping. Numerous surveys suggest that women are keener on shopping online in comparison to men, and by leveraging this specific audience, the company will be able to attract more niche advertisers as time goes by.

A couple of years ago, the company decided to monetize its audience by giving merchants the ability to sell their products through pictures on its platform. However, that project failed, as Pinterest found out that users are interested more in going directly to merchant’s online shops and acquiring the goods there rather than on the platform. As a result, it dramatically changed its strategy and pivoted to the eCommerce advertising business. Management decided that it would be best for the company to change its place in the sales funnel and let merchants buy ads on Pinterest itself to reach their targeted audience rather than to force them to sell their merchandise on the platform. This way, Pinterest is no longer competing with other platforms and marketplaces for higher GMVs and only benefits from running ads.

To make its platform more attractive to merchants, the company launched the catalog feature, which makes it easier for sellers to add their products and get more pins from users. In Q1 alone, catalog feed uploads were up more than 140% Q/Q. At the same time, by launching the Verified Merchant Program in March and announcing its partnership with Shopify (SHOP) in May, Pinterest is signaling to all investors that the eCommerce advertising business is the way to go. In 2020, the company wants to launch the automatic bidding for ad campaigns, offer greater analytical capabilities to its merchants and explore the possibility of combining images with videos.

Considering all of this, we believe that despite being unprofitable, Pinterest, with its $1.7 billion in cash reserves, has several competitive advantages that will help it to drive growth in years to come. We view the stock is a solid long-term play with an attractive risk/reward ratio. While it has a highly desirable and monetizable user base, its average revenue per user from the United States and the rest of the world is $4 and $0.21, respectively. In comparison, Facebook’s (FB) ARPU from the United States is $34, while its international ARPU is $2-3. By comparing these figures, we could already see the untapped opportunities that Pinterest should utilize. The company has already proved that it has a unique positioning and a highly monetizable user base, and all that’s left for it is to scale up its operations and wait for the rebound of the advertising business, which will inevitably happen. We’re long Pinterest.

This article was written by

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Disclosure: I am/we are long PINS. 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.

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