Discover more from UncoverAlpha
The face of Pinterest after the pandemic - analysis
This analysis is a follow-up analysis of the original Pinterest analysis found here.
The focus is to try to elaborate how I see Pinterest (PINS) moving forward after the pandemic from different angles, what things are important for me when evaluating PINS as an investment, and what my fair valuation of the company is like given the change of the environment and how I see the companies future.
Now before we get into the numbers and performance of PINS in the last quarter, the thing we have to acknowledge is the social commerce landscape. The competition and space, in general, are starting to heat up as more e-commerce companies are noticing the trend from e-commerce to social commerce. With that, we will see more and more fights for social commerce assets and content and with that for content creators.
Social commerce is heating up in the West
The social commerce space is really heating up in the last months. Just this year, social commerce sales in the US are forecasted to reach $36 billion, up from $26.7 billion last year, according to eMarketer. The competition in the space is also heating up. A big driver of this move is Facebook with its Shops and driving more and more sales through its Instagram platform. It is starting to scare traditional e-commerce players, and as such, they are looking for assets and partnerships to prepare better to tackle and not miss on the market.
Etsy recently announced its intention to buy Depop. Depop is social commerce two-sided marketplace that primarily targets Gen Z and millennial customers. Over 90% of Depop users are under the age of 26. Etsy already knows how social assets can drive their revenue as at some point, 40% of their social traffic came from Pinterest. Etsy is also “paying up” for the deal as Depop had $70 million in revenue and $650 million in gross merchandise sales in 2020. Etsy is reported to pay $1.625 billion for the company. So roughly 23 times Sales.
Shopify is also more than ready for the social commerce trend. It is expanding its partnerships with Pinterest and integrating the two platforms for a more seamless experience for the user. Also worth mentioning is that Jeremy Levine is a board member on both Shopify and Pinterest boards.
Facebook also announced in May a live shopping event taking place every Friday for 2 months. The event will be very interactive will sellers and buyers interactive in real-time.
On the other hand, the big player Amazon seems to be still sleeping more than not on the social commerce trends. Yes, they launched Amazon Posts, but it doesn’t seem to be a real step for a company like Amazon, and the traction given the potential of Amazon seems to be on the low side.
With all the players going at this space, if you are not Facebook, you have to rely and lean on a social platform like Pinterest, which is made for shopping and with a user base of over 400 million that provides the only real competition to Instagram and Facebook’s other digital assets.
What is the new driver for PINS?
Since we are finally moving toward a normal world with covid under control, we have to look at Pinterest going forward. Their recent earnings report scared some investors as they reported a deacceleration in user growth and guided user growth on the low side. While Covid was a big benefactor for PINS in terms of the user growth and engagement rates on stuff like cooking, do it your self-classes, gardening, the recent data from PINS suggest users are still using Pinterest only for different categories. Categories like travel, fashion, weddings, etc. Just recently, the company reported the following:
There are now more than 5 billion searches on Pinterest every month. As people prepare for a post-pandemic life, searches for outfits, vacations, and home renovations are at all-time highs, and searches for weddings have presumed pre-pandemic levels.
Also, searches for travel are really taking off. For May, Pinterest said that searches for “dream vacation destinations” are up 13x while searches for “luxury vacation” are up 6x.
The key thing – more ads, more users?
What I really like about the Pinterest platform is that the users don’t mind ads. In fact, ads are actually wanted. I wrote about this phenomenon in my initial analysis of PINS. And what I find even more interesting and what I think will be the new driver for Pinterest is the shopping features. The more shopping features PINS provides to the users, the more I believe they like the platform. This is because the users use the platform mainly for getting ideas on finding and shopping for products. So saving them time and finding the products they were looking for faster and easier is what they want.
So in my view, Pinterest shoudn’t be viewed through the lens of a traditional social media company where more ads mean user frustration and saturation. In this case, I believe that the more Pinterest provides relevant ads, monetizable features, and the more the platform is easier to fulfill the user’s purpose (that is mainly shopping), the more it can expect to see user growth and engagement growth. From a social media company’s perspective, this is the dream scenario.
But if we look at some numbers, this might be playing out already. In April, Pinterest launched Ads in Brazil. Looking at the search result volume for Pinterest in Brazil, we can see that volume has increased since the launch and is at all-time high levels in a 2 year period.
source: Google trends
Now to get a confirmation of this trend, we will have to wait for Pinterest earnings results and engagement numbers. Still, with PINS launching so many new features to amplify the social commerce experience, we might need to wait too long to see the results of this thesis play out.
Future of search & PINS is visual shopping with LENS
A very important path PINS is taking is the visual search and video path. They launched two important features. The first is; Idea Pins. It is a video-first feature aimed at creators. The feature is basically for creators who want to tell their stories via video, music, and editing tools. It is very similar to TikTok. With this feature, PINS can now add more social elements between users to the platform that were maybe missing on the platform since you want your users to follow other users and to be active on the platform for a longer period. It is a feature that makes the platform more attractive for creators and thus more appropriate for companies that want to advertise via influencer marketing strategies. More about the Idea Pin can be found here: Pinterest introduces Idea Pins, a video-first feature aimed at creators | TechCrunch
The other important feature is the Shop tab on the Lens visual search tool. Now users can basically take a picture of a product, and they won’t only get search results for products similar to the one they took the picture, but they have a direct tab with shoppable pins. This means that the experience of shopping via visual search is even more seamless. This is an important step, especially for the fashion and home décor segment, as I see this widely being used by individuals and many interior designers to save them time and offer their clients more tailored products.
The evolution of e-commerce away from text and into visual is what we can expect in the next years, and visual search and AR features are the things that will drive it. Pinterest seems to understand this fully and is taking the right steps.
Need to do more on content
With all the trends around social commerce and influencer marketing, social media companies and e-commerce companies are now in a race to gain the attention and adoption of influencers and creators. But these are not only big influencers that most of us know, but these are small, also called micro-influencers, who have a smaller following but more genuine relationships with their followers. The industry has acknowledged that these are key for driving sales, and with that, there is now a global fight for creators. Creators and influencers that provide content to the platforms and attract users. Pinterest in April announced their first Creator Fund that will help creators get started on their platform, especially creators from underrepresented groups. The fund size is $500k. While this is an important step in the right direction, in my view, it is not nearly enough. The fight for creators is real, and PINS is an important player in this space and should increase the fund size and go hands-on with the fight for creators. Just for comparisons other social media companies and their creator funds:
TikTok- $200 million (and pledged $2 billion)
Youtube - $100 million
Snapchat – reportedly spend $130 million (since November financing contributors on its short-form feature “Spotlight.”)
Having creators on your platform will be key for you as a platform to keep your users engaged and active. This is especially important as many social media platforms have a harder time getting new users as their active user bases are bigger and bigger. The user growth slows because you have fewer people you can reach that aren’t your users yet. So engagement is what you need to focus on when you are in a more mature phase of a social media company.
This is a segment where I expect PINS to lift their efforts more and make it so that creators, especially in certain categories that PINS dominates, will have PINS as their default platform.
Revenue & user growth metrics development
PINS has been one of those companies that have accelerated on all fronts in this pandemic, and now when we see the world slowly returning to normal, the last earnings reports give us some clues of what we can expect from Pinterest.
First and foremost, a slower pace of user growth. While user growth was up big in 2020, it was expected that user growth would stabilize in PINS as it did with all social media companies. In Q1 2021, MAU grew 30% YoY to 478 million, which was slower than previous quarters, but what really spoked investors was the guidance for Q2 MAU growth. In Q2, PINS expects MAU to grow in the mid-teens and US MAU to be flat on a YoY basis. While US MAU being flat is expected (US MAU has been steady since Q3 2020 at 98 million), a mid-teen global MAU growth on a YoY basis means that Pinterest expects international MAU growth to be flat in Q2 2021 compared to Q1 2021.
Now I want to be clear that it will be really important for me in the next quarters what PINS reports regarding international MAU. If we see flat user growth compared to previous quarters and if this lasts more than perhaps one or two quarters, that would definitely be a negative for me as it would potentially show that PINS is hitting on the ceiling of their user base. But if this is only for a quarter or two, it just shows that the pandemic pulled some demand forward but that the PINS user base can still grow and continue to attract new users.
And so far, I believe in the pull of demand thesis. Pinterest mentioned a lot of how they see new users from the Gen-Z generation stay on the platform and use it for not just shopping but also for ideas on where to travel etc. If PINS adds to their existing user base the Gen-Z generation, it could further drive their user growth for years to come. But what I really believe will drive the next momentum in user growth and already explained in this article is PINS making the platform more “shoppable.” All the shopping features improve the user experience and make the PINS platform more relevant with a clear sense of purpose – ideas on what to shop for.
If we move the discussion and focus on revenue, Pinterest’s latest quarter showed a 78% revenue growth YoY, and their guidance for Q2 is 105%. But with the guidance, you have to factor in that the Q2 2020 was a quarter where everything stopped, and PINS revenue growth compared to Q2 2019 r was just 4%. So the YoY comparison is much easier to beat this year. If we exclude that effect, the revenue guidance continues to show a stellar 70%+ revenue growth that has been going on since Q4 2020.
source: Pinterest earnings report
I believe the high revenue growth will continue as PINS is rolling out more and more features that help the platform be more monetizable and expand the shopping experience for the users. I am also not worried about ARPU reaching a peak because PINS demographics and user behavior, as already explained in my first analysis of PINS, are unique where users actually want ads as they came on the platform to shop. With the demographic, that has a lot of spending household power (young women). An important feature that is helping them propel their revenue growth is also the newly introduced auto-bidding option, where advertisers can now more efficiently put ads on the platform (remember, a similar thing happened with Facebook). The results of the auto-bidding feature are already showing results, as PINS explained in their last earnings call.
Pinterest undervalued compared to its peers
Now on the valuation part. First looking at multiples to forward revenue. Pinterest is trading at around 16.3 times Sales which is substantially less than Snapchat (24.33) but is bigger than Facebook (10.05). Interestingly, the valuation gap between Snapchat and Pinterest regarding forward P/S is the widest it has been in a while.
But the real value for me is to value platforms through their users. This metric I already applied in my first analysis but will update it given the new numbers. It’s called market cap per monthly active user. And the figures are the following.
source: own calculation
If we look at the numbers, we can see that a Pinterest user, according to the market cap of Pinterest, is worth $87. While a Snapchat user is worth $190 and a Facebook user is worth $274. Now, this is where I disagree with the market valuation. I think a Pinterest user is much more valuable than, for example, a Snapchat user. Pinterest users have bigger spending power, their intention on the platform is more orientated towards shopping and spending money as opposed to just having fun, and Pinterest users are more likely to spend larger amounts for items because they are mostly young women where they are either building their home, shopping for kid stuff or spending on clothes and fashion accessories. For example, teenagers that are Snapchat’s dominant user base have much lower income (with that spending power), and they are more likely given their life position to spend lower amounts in their current state. Not to mention that teenagers tend to change their minds about things they like quickly, and with that, you have a genuine risk that when that user becomes more mature, they won’t be using the platform anymore.
I believe the market is undervaluing the Pinterest user, although I think it is the most monetizable platform of all the above. Even if we went conservative and would put a fair value of a Pinterest user in the value of Twitter user at $136, the company should then be trading at around $65 billion, which is around the $100 per share mark and not at $42B or $66 per share where it is trading now.
Pinterest, when compared to all three other social media companies, has also had the biggest revenue and user growth in the past year, so the undervaluation compared to the peers by the market seems unjustified.
All in all, I think Pinterest is a great company to capture the social commerce trends that are unfolding and is not just a pandemic one-shot story. It is also one of the rare digital assets where monetization and user experience correlate positively with each other. On the valuation side, even if user growth were to slow substantially, the existing user base of PINS is vastly undervalued compared to its peers. That is why Pinterest is one of my main portfolio positions.
If you liked this article, you can subscribe to my newsletter. You can also follow me on Twitter @RihardJarc and on Commonstock, where I share my views and post my portfolio positions. On Commonstock, I also run a group dedicated to PINS where we share news and views of the company; feel free to join.
I own PINS.
Nothing contained in this website and newsletter should be understood as investment or financial advice. All investment strategies and investments involve the risk of loss. Past performance does not guarantee future results. Everything written and expressed in this newsletter is only the writer's opinion and should not be considered investment advice. Before investing in anything, know your risk profile and if needed, consult a professional. Nothing on this site should ever be considered advice, research, or an invitation to buy or sell any securities.