Spencer Platt
While Pinterest (NYSE:PINS) was one of the first companies to feel the pinch from normalized covid demand, the social media company is now starting to see positive signs of a turnaround. The market got far too negative on the sector with the stock stabilizing around the pre-covid levels of $20. My investment thesis is ultra Bullish on the stock still trading in the bargain bin.
Stability Before Growth
Pinterest surged back in 2020 due to a massive boost in monthly active users (MAUs). The company peaked at 478 million MAUs in Q1'21 and saw a trough at 431 million users in Q4'21.
Source: Pinterest Q2'22 presentation
Not surprisingly, the stock bottomed over the summer on signs the user base had indeed stabilized just above 430 million MAUs. Pinterest entered 2020 with 335 million MAUs and investors crucially needed to understand the normalization dip in the last year wasn't a new trend.
The ability to expand in the Rest of World region has always left the business on a trajectory towards higher MAUs over time. The current rebound has occurred even with Europe and U.S. users still trending down. The ROW bottomed and has rebounded with 8 million more MAUs than the Q4'21 bottom at 215 million.
Investors shouldn't expect much user improvement this year, but Pinterest is set up for easy comps to top starting with Q4 numbers. Once the user issue is resolved and returns to predictable growth, revenue growth becomes rather rudimentary.
Even with the tough user issue, Pinterest grew Q2'22 revenues by 9%. The company provided guidance for only $665 million in the current quarter based on 5% growth as the ad market gets tougher, but the user base is highly under monetized.
The company has a global ARPU of only $1.54 in the last quarter while Meta Platforms (META) averages $9.82 per user in Q2. The social image sharing business on Pinterest has long been forecast as a more attractive place for brands to advertise, but the company still has a long path forward. The global ARPU surged 17% in the tough Q2 in an indication of the easy monetization path higher.
Heck, the company just hired the former PayPal (PYPL) COO in order to shift the business towards social commerce. Pinterest can vastly improve the ARPU via making the platform directly tied into users being able to purchase items identified from leading e-commerce platforms and brands.
New CEO Bill Ready was spot on with this goal for Pinterest going forward on the Q2'22 earnings call:
Pinterest is really one of the only platforms that sits at the intersection of social media, search and e-commerce. And I'm incredibly excited to help unlock the company's potential.
Another positive sign for the sector was Snap (SNAP) announcing via an internal memo to the employee base that QTD revenues were growing at an 8% clip. The company forecast flat revenue just the prior month when reporting Q2 results.
A similar ad market improvement for Pinterest would lead to 10%+ YoY growth in the quarter. Investors shouldn't expect a similar delta with the 800 basis points of growth forecast by Snap due to the Snapchat owner possibly providing kitchen sink guidance. The social messaging company had already cut numbers and likely didn't want to again fall into a scenario of missing Q3 numbers.
In addition, the new Shuffles app launched on July 27 provides an ability to generate videos for other social media platforms. The app could help elevate the Pinterest platform amongst other platforms like TikTok and Instagram trying to vie for customers eyeballs while Pinterest offers a unique imaging platform generally free of politics, trolls and Chinese influence.
Bargain Bin
Elliott Investment Management loaded up on the stock with a now disclosed 5 million position size placing the firm as the largest investor in Pinterest. The company likes value plays and the social imaging company falls into that category around $20.
The social media space offers a far different valuation equation now with the market sell off. Pinterest once traded far above 10x forwards sales and now the stock is down below 5x sales. Snap and Meta both trade at slightly lower forward P/S multiples after massive sell offs over the last year.
Pinterest is slightly elevated compared to market peers due to some traders expecting a takeover bid. The company has too much potential to monetize users at far higher rates to accept an offer down here.
At just a $5 quarterly ARPU, the social imaging platform would generate over $2.2 billion in quarterly sales and still monetize users at half the rate of Facebook. The stock wouldn't appear very expensive with a market cap around $15 billion and a balance sheet loaded with $2.6 billion in cash and marketable securities.
Takeaway
The key investor takeaway is that Pinterest shows a lot of positive indications of the business turning around and the stock bottoming. The news from peer Snap helps improve the sector view while Pinterest has the CEO for the next phase of the business. As the user base has normalized at a higher level following covid pull forwards, the scenarios add up to a new trend for the business by the time the business exits 2022.
Investors should use the current price to load up alongside Elliott Management.
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