Not So Deep Dive: Pinterest Revisited
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Show Notes
(Ryan) What they do: Last time we looked at Pinterest was Apr. 15th, 2021. From the last time we discussed them “Pinterest is a social discovery app that helps people (pinners) find inspiration. Way it works: You set up an account like any social media app. Then use the search bar as a discovery tool or you can post pins. You can create boards, which is kind of like a file of different pins.”
Pinterest pretty much still serves the exact same function. The generate revenue in pretty much 3-4 ways. First is ads, and they actually break these into performance and brand ad slots for advertisers. Brand ads pay per impression or view, whereas performance pays for conversions. And then the other ways they make money if someone clicks on a merchants page in Pinterest and ends up buying something. They’ll get a little referral bonus. But by in large, most of the revenue comes from advertising.
(Ryan) History: Pinterest was officially founded in 2010 by Ben Silbermann, Evan Sharp, and Paul Sciarra. Silbermann attended Yale University and worked at Google in its online advertising division immediately after.
Apparently he wanted to build something of his own, so with the encouragement of his girlfriend he left Google and started Cold Brew Labs with Paul Sciarra (college friend). Cold Brew Labs was an app development company and their initial product was a shopping comparison app named Tote. You could browse apparel and goods from 30 different retailers in one app. This app ultimately failed, but they learned that a lot of people came to the app simply for discovery.
This created the idea for Pinterest. Paul and Ben quickly came up with a Beta, and pitched the 3rd co-founder Evan Sharp to join in 2010 to fine tune the app (he was credited with writing most of the code). Later in 2010, they officially launched Pinterest but had it as an invite-only platform to start. Obviously, they’ve now removed that and grown their user base. IPO’d in 2019.
(Brett) Industry/Landscape/Competition:
Pinterest is in an interesting hybrid industry where they are competing for time spent on social media while also time spent on finding inspiration for things to buy/do (sometimes these mix)
Business model is largely advertising right now. Digital advertising is a large market but the size is disrupted depending on what research you look at. Statista says $566 billion in spend in 2022 (my bet would be on the lower end now) that is supposed to grow to $700 billion by 2025.
Side note: if there is actually $700 billion in spending in 2025, a lot of stocks are incredible bargains right now
Competitors: We all know them.
(Ian) Management and Ownership:
Ben Silbermann is the CEO
He owns about 6% of shares outstanding
Evan Sharp, the other co-founder left in 2021 to join Jony Ive’s design firm
Still on the board and an “advisor”
Left around the time paypal acquisition rumors were being discussed
Paul Sciarra also holds about 6% of shares
Left the company in 2012
Dual share class structure means that both Ben and Paul each have over 30% of the voting power
(Brett) Valuation:
Last time: P/S of 26.6, P/GP of 36.4,
Market cap of $12.5 billion, ticker PINS
Assuming the 50 million in dilutive securities + 25 million in new RSUs granted eventually get exercised, the market cap is actually $14 billion
EV of $11.32 billion when you subtract out the cash from fully diluted market cap
EV/s of 4.24
EV/GP of 5.3
EV/OI of 28.7
(Ryan) Earnings: Last time we spoke about them was pretty much a year ago. So all year over year comparisons are also comparisons to when we last visited them.
Q1 revenue: $575M, up 18%
Q1 Monthly Active Users: 433M, down 9%
ARPU was $1.33 vs. $1.04 last year
Operating income: -$3.7M vs. -$23M last year
Free cash flow margin: 35.9% vs. 55.5%
Spent $174M on S&M this quarter, 33% more than last year.
(Ian) Balance sheet and liquidity:
Cash of $2.7B
No debt ($200mm in leases)
Anecdotal Evidence:
(Ryan) I’ve used it on occasion. Solely for inspiration though. I’ve never transacted.
(Brett) Never used it. Tried to get some from people on Twitter but Fintwit wasn’t much help
(Ian) Use it occasionally as part of projects with our people or for ideas
Future growth opportunities:
(Ryan) Your Shop. Here’s what they said about it in the letter, “a customized shopping page powered by our taste-driven algorithm informed by Pinners’ unique preferences and styles.” So it’s a curated list of things to buy for Pinners. And they said they continue to test out their in-house checkout experience. Right now it still redirects to new websites. If they can get this right, I think it’d be a big deal.
(Brett) Short-form video content. They are making lots of investments here (even paying people to post) for pinners. Video idea pins grew 15x in Q1 YoY. Seems like it would fit fine on the platform but competing heavily with the big dogs Instagram, YouTube, Tik Tok.
(Ian) Shopping. Pinterest says monthly shoppers spend 2x more than on rival platforms. APIs are important
Highlights and lowlights:
(Ryan) Highlights: They are increasing ARPU at a strong rate and they’ve pretty much already reached scale. They’ve also nailed the inspiration part. Lowlights: I’m concerned about their ability to monetize the platform. They have to somehow make social commerce a reality in the West. And I also think we’re seeing throughout a lot of tech companies rn, that SBC is becoming far more dilutive as the stocks have fallen. Said they’re losing timeshare to TikTok.
(Brett) Highlights: It is providing a lot more value than it is taking right now, core product seems slightly differentiated. Still lots of potential (key word: potential) in Europe and other wealthy international markets. Lowlights: I don’t think MAUs are as valuable compared to many other digital platforms, they have an SBC disease. Looking at the income statement, I have a hard time seeing where 20%+ operating margins come from.
(Ian) Highlights: One of only a few social media platforms at scale. Cashflow positive and plenty of cash. I think there’s a lot of optionality for monetization (shopping, Lowlights: SBC, optionality
Bull case:
(Ryan) They’re able to make the shopping experience truly seamless and convert users into transacters. That should drive ARPU expansion. Brett’s right, I’m not sure you need user growth from here, but you definitely need ARPU expansion. If ARPU doubles and FCF margins stay at 25%, you’re looking at $1.3B in FCF.
(Brett) Global ARPU doubles in five years. Based on TTM ARPU numbers, that would equate to $5 billion in annual revenue in 2026. At current EV (including current stock dilution) of $11.3 billion, seems like the market would value this decently higher if they can show decent operating leverage.
(Ian) Brett and Ryan are providing good numbers here so I won’t add my own and muddy the waters. All I will say is that if ARPU growth continues growing at over 20% CAGR for an extended period of time, I see a path to good returns.
Bear case:
(Ryan) Well if they keep spending on sales and marketing and all they get is declining users, they’re probably not gonna be generating enough cash to create good returns.
(Brett) Users continue to decline. Digital ads end up being cyclical. Big product initiatives don’t gain enough traction where the ROIC is high (invested capital = headcount growth).
(Ian) ARPU flatlines and paired with stagnant user growth causes the valuation to take a significant hit at which point shareholders are clamoring for a take-out.
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Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this show.