Pinterest Stock Analysis - DCF Model

Summary

• Pinterest offers Online bulletin boards.
• Company shows high growth but is not profitbale yet.
• Discounted Cashflow Model - Estimation of Users, Revenue, Net Margin and Owners Earnings.
• Share seems to be overvalued.

Overview and Business Model

Pinterest Inc. is a US-American technology company that operates an online bulletin board. This bulletin board serves as a source of inspiration for users for all possible aspects of life. The bulletin board displays numerous photos, which usually offer further context, such as links to videos or blog posts.

Users can create individual pinboards and share them with other users and collect their favorite pins.

At the same time, the pinboard serves as a surface for advertisements, which are the main source of Pinterest's revenues. Depending on the ad format, these are billed according to cost-per-click, cost-per-1000 impressions or cost-per-view.

The two most important key figures for the growth and development of Pinterest are the Monthly Active Users (MAU) and the revenue per user. In Q2 2020 the number of Monthly Active Users was 416 million. The revenue per user in Q2 2020 is USD 1.22.

The number of users in the USA is 96 million and 321 million internationally. The international user growth is significantly stronger. This is in stark contrast to the average revenue per user. In Q4 2019, the average revenue per user was USD 4.00 in the USA and only USD 0.21 internationally. For Pinterest, the fourth quarter is the strongest quarter of a year.

As of December 31, 2019, Pinterest had 2,217 employees.

DCF Valuation

The analysis of such a growth share and the determination of a fair value per share is only meaningful using DCF methods. At this point we would like to explain how we made our estimates for sales, net income and owners' earnings.

In the first step we used statistical methods to estimate the growth of Monthly Active Users.

We estimate that the number of active users will increase from the current 417 million to 740 million in 2028. We expect a relatively stronger increase until 2024, which will then level off.

In the second step, we estimated the revenue per user. Here we estimate that this will be around USD 4.04 per user in 2020 and will increase to USD 8.90 by 2028. This corresponds to an average annual growth rate of about 10.4%.

By simply multiplying these first two estimates, we obtain our revenue forecast for the period 2020 to 2028.

The third step is to estimate the profitability of Pinterest. Two questions arise from this. When will Pinterest become profitable and what net margin can the company achieve?

Data from Prof. Damodaran of NYU Stern in New York show that comparable companies in the same industry achieve a net margin of approximately 20%. This leads to our estimate that we will achieve a maximum net margin of 20%. By extrapolating revenues and costs, we expect that Pinterest will still achieve a net margin of -10% in 2020, break even in 2021 and then increase until 2026, and reach the "target net margin" of 20% for the first time in 2027 and 2028.

Since our DCF method is not based on net income but on owners' earnings, we have estimated the following owners' earnings based on our estimates for capital expenditure and working capital requirements. We assume that these will still be USD -312 million in 2020 and USD 1.5 billion in 2028.

We have estimated a growth factor of 2% for the terminal value. In view of the long forecast period, we consider this to be justified. WACC is calculated as 7,68%.

The equity value, calculated using the DCF method, thus amounts to c.a. USD 20.8 billion. This corresponds to a value per share of 35.38 USD. The margin  safety margin is therefore about -10%. So the share seems to be overvalued.

Result

The pin boards that Pinterest offers its users are unique and offer users and advertisers added value that other social media and online services do not. The number of current users and the strong user growth confirm this.

Above all, the development of sales per user will be important for the success of the company and the share, especially in international business. While advertising revenues in the USA are already solid and monetarization has progressed further, international business is still miles behind, even though 3/4 of the users come from "abroad".

This Stock analysis is based on very uncertain estimates and forecasts, which are based on a longer forecast period. We have of course calculated this to the best of our knowledge and belief. However, as already explained, these are only forecasts that can and certainly will be off-target. We will continue to do so and will update our estimates on an ongoing basis.