Pinterest - Placing The First Pin
Summary
- Pinterest has seen a huge sell-off as it sees lower active users in the US.
- This is largely driven by pandemic trends, with the economy opening up again.
- This is causing nerves among investors, but rapid ARPU growth should drive continued growth, even if some of these user base declines last.
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Pinterest (NYSE:PINS) announced second quarter results which were not well received by the market, triggering quite a big sell-off, which interests me as I consider Pinterest among the least annoying and still largely underpenetrated social media companies out there.
Early in June, I concluded that it was almost time to place a pin with shares trading around the $65 mark at the time. In the two months which followed shares rose to $80 as markets recovered, but are now back to $59.
Fundamental Take
My fundamental enthusiasm on Pinterest is driven by the observation that the business model is less annoying than some other social media models, the strategy of ¨pins¨ makes this a pull model of content and not a push model, resulting in better engagement and more control on content displayed. Besides pleasing consumers, it makes that it attracts less scrutiny from regulatory and legislative bodies as well.
With the platform based on ideas instead of people, there was a major second opportunity as well, as the level of ARPU, but notably, the discrepancy between US and international ARPU was huge. The business was initially hit a bit amidst the outbreak of the pandemic, initially hurt by the pressure on advertising markets, but revenues recovered quickly as people spent more time and money on their hobbies.
In the year 2020, first quarter sales were still up 35% year-over-year, growth slowed down to 4% in the second quarter, but a big recovery was seen in the second half of the year with third quarter sales up 58% and fourth quarter sales even up by 76%. If we annualize the fourth quarter results, the company was a $2.8 billion business with real earnings of $800 million, for earnings equal to $1.20 per share.
With shares trading at $80 at the time, the $54 billion operating asset valuation was equal to 20 times sales and 70 times annualized earnings. Of course, forward earnings multiples are lower, yet the fourth quarter is typically a seasonally strong quarter and hence extrapolation of those results is not the right way to go.
2021 - Tough Growth And Engagement Comparables
2021 started on a solid note with sales up 78% to $485 million, let GAAP losses of $22 million were not that convincing of course. The company guided for second quarter sales growth around 105%, on the back of easier comparables after a softer second quarter last year. Second quarter results looked strong with revenues up 125% to $613 million as a $69 million net profit was reported as well.
The 692 million shares now value the company at $41 billion including a net cash position of just over $2 billion. The $39 billion operating asset valuation, makes that operating assets trade at 13 times sales, if the company can generate $3 billion in sales (my previous target), which is a big if with revenues in the first half of the year reported at $1.1 billion. Worrisome is that there are risks to this $3 billion number with third quarter sales seen up 40%. This suggests that sales come in at $620 million, largely in line with the second quarter, not marking much sequential revenue growth.
Part of the reason is ironically enough the pandemic, now on its way back (and hopefully for good). The monthly active user base numbers in the US fell 5% to 91 million in the second quarter, yet revenues more than doubled as ARPU more than double to $5.08 as well. The international user base grew 9% to 454 million, being 5 times as large as the domestic user base by now, but ARPU here is just $0.36.
Moreover, there is real anticipated weakness in the third quarter as July trends reveal just 5% international user base growth and a 7% decline in the US, revealing that the user base trends have only worsened from the second quarter.
And Now?
Engagement is key in any platform and social media name, but I understand that the nature of Pinterest makes it more susceptible to Covid-19 trends, certainly as we are lapping the most restrictive phases of the pandemic this time last year, although that does not apply for July.
Nonetheless, I do not think that current declines reveal real inherent weakness of the platform, as the potential is still very much there. Even if growth in the user base is structurally much lower, the international ARPU numbers reveal stellar upside in terms of sales and thus margins.
Basically, the reverse Pareto rule applies here. More than 80% of the global user base are international users, but domestic ARPU is about 14 times larger than the international ARPU base. Besides a small narrowing in the gap between both metrics (with international ARPU continuing to grow at a rapid pace) and the overall level being relatively low to other platforms, it is these trends which make me upbeat as Pinterest is and remains the undisputed leader in its field.
While some engagement trends in the active user base are worrying, this can be explained by pandemic trends and timing of marketing efforts, allowing the company to turn solid profits in the meantime. With the ARPU tailwind being a greater force than slower or small declines in the user base, I am still upbeat in the long haul.
While the current valuation is far from a riskless proposition, the potential current sales multiples in relation to the growth still reported, make Pinterest a (relative) interesting play for those still underweighted to the technology sector.
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This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of PINS either through stock ownership, options, or other derivatives. 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.
Small allocation initiated here.
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