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No. of Recommendations: 77
Pinterest (PINS) is a new position I’ve been building for a few weeks. I’ve had my eye on them for a little while after CMF_KBecks brought it to the board back in July. https://boards.fool.com/pinterest-pins-34250665.aspx. Gauchochris and I did a bunch of research. He has served as a wonderful sounding board and then I found that an investing website that I use also had written it up, https://www.investingcity.org/ (I have written articles for investing city but receive no pay and have no financial interest in it). Without further ado, more below.

I got tired of the tedium of trying to get tables correct on this darn website. A great companion read to my write up is PINS shareholder letter. It has pretty graphs and nice tables. Here is a link. https://s23.q4cdn.com/958601754/files/doc_financials/2019/q2...

Overview
PINS at its heart is a visual discovery engine with built in sharing and social functions. Basically a user identifies their interests, “modern homes, DIY backyards, cars” and then Pinterest fills your clipboard with pictures/videos/GIFs of things it thinks might interest you. Over time it refines the clipboard into a relatively sophisticated profile of you by what you click on and what you “pin”. Pinning a picture or video saves it to your clipboard/profile. As you might imagine this type of data is very valuable to advertisers because they are able to target you with exactly what you like. The service is very useful for its users because it allows them to discover new things around their interests. I signed up for an account and overall have been very impressed with how well it works.

PINS ability to keep people interested in its service rests on getting people to post content that PINS can then show to other people. The more customers PINS has and the more that PINS knows about what each customer likes, the better PINS is able to make money by leveraging that data with advertisers. From a high level, PINS the business depends on pleasing two seperate groups, users and advertisers. Up until the last year or so, PINS has focused mostly on making themselves useful to users and now they are making a strong push into making PINS a useful advertising platform. We will talk about both below.

Users/Engagement and Monetizing/Advertisers
Pinterest has 300 million global monthly active users (MAUs). 85 million of those users come from the US and the other 215 million are international. About 70 percent of users are women which is pretty incredible then that they have 85 million users in the US. Presumably about 60 million are women.

International vs US users is an important distinction since the average revenue per user (ARPU) is much higher for US customers at 2.8 dollars per user vs 0.11 cents per user international. Unfortunately PINS doesn’t break down where in the world those international users come from. We know from common sense and other social networks like Facebook that US users are the most valuable then other developed nations such as Western Europe and other English speaking countries. For Facebook a European user is worth about ? of a US customer, Asia about 1/10th and rest of world about 1/15th. Just as a comparison, Facebook earns about 33 dollars per MAU compared to 2.8 dollars at PINS. PINS currently just lumps all their non US customers into one basket called international.

On the monetizing side, Pinterest has begun to heavily invest in making its platform as frictionless as possible for advertisers large and small. They have also begun to open business centers in major markets mostly targeting Western Europe and English speaking countries. As of this writing, Pinterest now has business centers in most of Western Europe. In addition to opening business centers, Pinterest has begun developing tools to minimize friction for advertisers to get their content onto the platform as well as tools to track and analyze ad performance. Some of their tools are pretty innovative such as Catalogs which allows brands to have digital catalogs to show “looks” like outfits etc. as an ad. A person can then buy right from the picture everything they see. They are in the very very early stages of monetizing both the US, English speaking countries and Western Europe.

Some Numbers, MAU and ARPU
Pinterest shows pretty strong seasonality with most major holidays driving a fair amount of traffic. Last year Easter fell into Q1 and this year it was in Q2 which drove a couple of percentage point increases in q2 of this year. Q4 has historically been the strongest quarter from both a MAU and ARPU standpoint.

Pinterest’s MAUs for the US market is relatively mature and will probably see fairly pedestrian amounts of growth unless they are able to appeal to more men. In 2016 they had an average of 67 million MAU, 2017--73 milion, 2018 --79 million, and so far in 2019, 85 million.

International MAUs are still growing rapidly and will probably continue to do so for a few years. They are currently at 215 million international MAUs growing in the mid 30% range.



US MAUs International MAU US ARPU International ARPU
2016 Q1 65 63 0.74 --
Q2 65 70 0.96 0.01
Q3 69 81 1.07 0.03
Q4 70 90 1.60 0.04
2017 Q1 71 104 1.13 0.03
Q2 71 114 1.36 0.04
Q3 74 129 1.52 0.05
Q4 76 139 2.17 0.07
2018 Q1 80 160 1.59 0.05
Q2 75 156 1.96 0.05
Q3 80 171 2.33 0.06
Q4 82 184 3.16 0.09
2019 Q1 85 206 2.25 0.08
Q2 85 215 2.8 0.11


Pinterest is in the beginning innings of monetizing in ALL their markets. ARPU is growing about 40% a year in the US. International monetization is even earlier in the story and management has said not to expect much of an acceleration in ARPU until the end of 2019 or early 2020. Modest increases in US MAUs and rapid increase of US ARPU along with rapid increase in international MAUs and modest increases in international ARPU is providing for >55% revenue growth.

Revenue, cash, opex etc:
Pinterest has a pretty incredible 1.85 billion in hand, most of that from their IPO.


Rev Rev growth % OPEX as a % of Rev
2018
Q2 161 59.4% 87%
Q3 190 64% 76%
Q4 273 57.6% 59%
2019
Q1 201 53.7% 85%
Q2 261 61.9% 83%


Gross Margins are in the 64-75% range and improving.
No debt


Some Simple Projections
If we assume similar seasonality to previous years, Pinterest should have some really solid growth ahead of it. They are now focusing on growing their international ARPU but now that is on a large 200+ million base of monthly users. If we assume, as management said in their CC, that they are able to increase their US MAU slightly to 87 million and their ARPU in line (35%) or slightly below what they have done to 3.14 cents, they will have about 267 million Revenue from the US and international should be in the 30 million range for revenue growth in the 56% range. If they are able to start to show some movement in international ARPU then they could see a significant beat. Regardless, I think they have a pretty easy path to 50+% growth for the foreseeable future. Pinterest only gives year-end guidance which is between 1.095 and 1.115 billion. This would imply only 40ish % growth in the back half of the year. I’ll eat my shoe if that is all they do.


My Take
In my opinion, Pinterest is the anti-social network social network. They seem to have a strong focus on wellness, privacy and responsible usage. Almost a social network 2.0. I’ve been very impressed with management. They know their business very well and seem to have a very strong grasp on which levers to pull going forward. I give Management an A.

I think PINS’ growth prospects going forward are wide open. Facebook’s US ARPU is around 30 dollars, 10 dollars or so for Western Europe. I’m not suggesting that Pinterest will become as large as Facebook but I bring them up just to highlight that at the very least, Pinterest has far to go from their 2.8 of us ARPU and 11 cents of international. I give them an A on possible growth.

I also think that PINS can grow >50% for a while since MAUs are still growing and ARPU should continue to grow rapidly. I give them an A here too.

Pinterest is rapidly approaching some level of profitability. I’ll be interested to see if management tries to reach profitability or they continue to grow the business rapidly. That might not be an either/or question for PINs. With 1.85 billion dollars in the bank PINS has LOTS of optionality. I have zero worries about them going out of business.

I think PINS has a lot to offer advertisers since they have such incredible data around what their users like. Not only that but PINS continues to innovate on ways for advertisers to display their products. I think Pinterest Catalogs is such a great idea since it allows the advertisers to display curated content...think of things like the Ikea catalog or Macy. I don’t know of any other website that has really cracked the curated advertising content like PINS has. In one of their CC, Pinterest said they have close to an 80 percent conversion rate over a 30 day period. That is incredibly valuable to advertisers.

From a valuation standpoint, we have a company with tons of cash, growing >55%, approaching profitability with an EV/S of 17. They now have tons of cash and visibility from the IPO. I think they will continue to grow rapidly and be much larger in the future. I’ve been investing in them and will continue to increase my position size with good business results.

If this write up has sparked your interest, definitely go back and have a listen to their conference calls as well as read their shareholder letters. Lots of good stuff that I didn’t cover here.

Best,
Ethan
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