2023-11-02 08:28:48 ET
Summary
- Pinterest sees a huge opportunity to gain market share in the digital advertising market by targeting high-intent users and increasing engagement and relevance.
- The company aims to attract more users, particularly in the rest of the world segment, and increase average revenue per user to close the gap with competitors like Meta Platforms.
- Pinterest's strategy includes focusing on user engagement, increasing ad load, and shifting towards lower funnel advertising to drive conversions and improve monetization efforts.
In this article, I will discuss the huge growth opportunity that Pinterest ( PINS ) has going forward and why I'm not buying.
The Opportunity
Pinterest annual revenue growth (stratosphere.io)
Since 2017, Pinterest has grown revenues at a compounded rate of 37% . The contributors can be broken down to Monthly Active Users (MAU) growth contributing 10% and innovations in ad tech driving 20% of this growth.
Over the past 3 years revenue growth has slowed, which has been driven by a slowdown in MAU growth and a soft demand environment for advertisers due to inflation and rising interest rates, coupled with industry headwinds such as Apple's ( AAPL ) ATT changes. However, Pinterest has fared better than peers who have seen declines in revenue. I attribute this outperformance to the rejuvenation of the app and the subsequent growth in MAUs after Bill Ready took over as CEO in Q2 of 2023.
Pinterest is targeting a long term growth rate of 20% over the next 3-5 years. I think this is possible and I expect the growth will be driven by increased ARPU mainly from ROW and a moderate contribution from Europe, coupled with the increased ARPU across all regions thanks to the increased pace of innovation Pinterest has fostered.
Long runway for growth ahead
Pinterest currently has less than 1% of digital ad spend. The company has the opportunity to gain market share in the large and growing digital advertising market, which belief is based on the fact they sit at the intersection of Social and Commerce which gives them high commercial intent users which could be highly monetisable, with over half of MAUs looking to buy on the platform.
Pinterest can grow in a number of ways. Firstly, attracting more users and secondly, increasing ARPU. To increase ARPU they are targeting 4 different areas; increasing engagement by increasing relevance of feeds, increasing actionable content on the platform by making every pin shoppable, increasing content and ad supply and finally, innovations in ad tech.
The opportunity ahead helps frame our future growth potential. The digital ads market remains massive, and our opportunity is as large as ever. We're less than 1% penetrated in the global and UCAN markets today, and we remain confident that we'll continue our long-term track record of growing significantly faster than the market. - Bill Ready, CEO - Investor day 2023 (Sign-in required)
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Digital Ad market overview (Pinterest Investor day 2023 )
On top of this small market share, the digital ad market is expected to grow at a CAGR of 10% over the next 3 years, providing an extra tailwind for the company's growth strategy.
More users
The first part of Pinterest's strategy is to increase user growth. I expect Pinterest will be able to sustain MAU growth in the mid single digits thanks to the rapid growth of the ROW region, offset by minimal growth in the highly penetrated US & Canada market.
Pinterest has a diverse user base of 482 million monthly active users, with nearly 80% (Sign-in required) coming from outside the United States. Two-thirds of Pinterest users are women, and 42% are Gen Z. In the United States alone, Pinterest reaches 50% of people online who have a college degree and 57% of women earning over $200,000 a year. These stats demonstrate the high quality user base that Pinterest has garnered for itself.
Global Quarterly MAU (Stratosphere.io)
In 2021 and the first half of 2022 before Bill Ready joined, users were declining, even after the pandemic unwind had completed for others. These declines were for several reasons; first, Pinterest focused on increasing entertainment video supply and the creator-driven ecosystem like their social media peers. That bet did not resonate with Pinterest users and it particularly hurt engagement in the U.S. Secondly, in November 2021 Google changed their search algorithm resulting in lower search traffic which slowed new user discovery. Finally, Pinterest experienced higher competition from video centric platforms such as Tik Tok and Instagram particularly in more mature markets as they all competed for a user's time, management claimed it was "difficult to quantify" the impact, however, it's clear to see the decline in MAU's during this time.
In Q2 2022, Bill Ready became CEO and by Q3 2022 management had stabilised the user base by working on personalisation and focusing on their core competency of being a visual search engine.
Recently MAU growth has grown despite the company implementing brand safety efforts in Q1 2023 such as: users having to provide age and accounts being private by default. These actions have moderated MAU growth, despite this user growth has grown at 7-8%, which I expect can continue.
User growth will become less important over time
In the 2022 10-k, Pinterest comments,
"We anticipate that our active user growth rate will decline over time if the size of our active user base increases or we achieve higher market penetration rates. As a result, our financial performance will increasingly depend on our ability to increase user engagement and our monetization efforts."
US & Canada MAU growth (stratosphere.io)
I believe this to be true as Pinterest is a niche player which has a smaller overall TAM than Meta Platforms. The US & Canada segment is already demonstrating this as MAUs have remained flat at 96 million over the last few years and I don't expect that to materially change going forward.
ROW MAU growth (Stratosphere.io )
ROW is a different story, the regions MAUs have been growing at 14% annually and I believe they can sustain a double digit growth rate over the 3-5 year period as they penetrate new markets and increase penetration in existing areas.
ARPU
Average revenue per user is the biggest factor that will affect performance going forward and Pinterest has a big opportunity ahead of it.
Meta Quarterly ARPU (Stratosphere.io)
Meta Platforms' average revenue per user (ARPU) is more than 5x higher than that of Pinterest's. This significantly lower ARPU gives Pinterest the opportunity to close it if they are able to. Although management has not actually given any kind of ambition as to what they believe they can achieve.
Global ARPU (Stratosphere.io)
Over 50% of users have the intent of shopping on Pinterest, suggesting that Pinterest should be able to provide highly relevant ads and close the ARPU gap, however this hasn't happened so far.
ARPU can be increased in three ways: First, increase engagement to keep users on the platform longer. Second, increasing Ad load. Third, Increasing Ad pricing. I will discuss each of these below.
Engagement
Pinterest's strategy has changed in a number of ways since Bill Ready took over in Q2 2022. It has gone from "underutilizing" its intent-based signals to making them the foundation of everything it does in order to show more relevant content and better recommendations. Personalization drives a more than 60 % increase in saves per monthly active user.
It has also gone from being highly exposed to SEO changes to focusing on deepening engagement directly on its mobile app, which now drives more than 80% of its revenue and engagement. Additionally, Pinterest has gone from focusing on entertainment-based short-form videos to doubling down on what makes it great; leaning into curation at scale. Finally, it has gone from trying to be the retailer with shopping siloed as a side feature to partnering with retailers and making all of Pinterest shoppable.
These changes have been successful, with user growth returning and engagement metrics growing 14% year-over-year, this is almost double the growth of MAUs. This increased engagement is also bringing users back to the app more, demonstrated by the WAU/MAU reaching 61 % in 2022; the highest ever.
Engagement trends (Pinterest investor day 2023)
In Q3 2023, engagement still continues to outpace user growth.
The company still has 100 s of millions of episodic users which could become regular users if successfully executed. They will achieve this by improving personalisation, relevance and bringing features that make it more engaging, such as shopping and boards.
Increasing AD load
Pinterest has a significant opportunity to increase ad loads. According to Bill Ready, Pinterest could theoretically have an ad load of 60-70% providing the ads are relevant. Most of the time with Pinterest the Ads are higher quality than user generated content. Pinterest is currently running roughly 20 % load, so it could triple from here.
you could never sign another user, never get another unit of engagement and you can multiply the business several times over just by getting the proper monetization per unit of intent . - Bill Ready
Pinterest has a high concentration of users with commercial intent, with over 50% of users seeing Pinterest as a place to shop. Additionally, 96% of searches on Pinterest are unbranded, meaning that users are open to finding new products and brands. With highly relevant ads, Pinterest can grow both ad load and engagement.
Pinterest is the rare business, where the interest of users and advertisers are aligned, relevant ads on Pinterest or content. When we deliver on relevance, increasing ad load can increase engagement, spinning the flywheel that you see on this slide. - Julia Donnelly - CFO (Sign-in required)
In Q3 2023, Pinterest increased ad loads while simultaneously driving engagement suggesting that the strategy is working. However, no increase in ARPU has been noted.
Increasing AD pricing
Pinterest is shifting its focus to lower funnel advertising, which means helping advertisers reach potential customers who are closer to making a purchase decision. This is a significant change, as Pinterest has traditionally been seen as an upper funnel platform, where advertisers focus on reaching potential customers early in the purchase journey.
Over the last several years, Pinterest has built a large performance ad business, it still remains nascent compared to peers though. Since Bill Ready took over, Pinterest has delivered more ad product innovation than in the prior two years combined. The company is aiming to improve relevancy which will increase ad pricing.
In 2022, Pinterest's ad revenue was split in thirds between upper, mid and lower funnel advertising, despite the improvement this hasn't changed since Bill Ready took over. Pinterest believes that lower funnel advertising is a huge opportunity for them, however this is yet to be seen.
Pinterest's new lower funnel advertising strategy is based on two key differentiators:
- First: Consumer intent - Pinterest users are actively searching for ideas and inspiration, which means they are more likely to be interested in purchasing products and services that they see on the platform.
- Secondly: Complete full funnel solutions - Pinterest offers a variety of advertising solutions that can help advertisers reach potential customers at all stages of the purchase journey, from awareness to consideration to conversion.
To support its new lower funnel advertising strategy, Pinterest is:
- Making every Pin shoppable, so that users can easily purchase the products and services they see on the platform.
- Advancing measurement capabilities for advertisers, so that they can see how effective their lower funnel advertising campaigns are.
Pinterest believes that if they can shift from upper funnel impressions to lower funnel conversions this will pay them 5x more. So far, full funnel conversion rates are 2x higher than when ads are seen for just one objective.
We all know this last stage was previously an Achilles heel for Pinterest. It was a missing puzzle piece. But we are solving that at scale now. We've seen more than a 50% increase in click-throughs and saves of viable items in Q2 of '23 compared to the year before. And that's thanks to the strength of our new lower funnel offerings. - Bill Ready, CEO, Investor day 23
In 2023, Mobile deep linking has been performing well with a 35 % increase in CPA. Pinterest has been improving ad relevance in a number of ways; incorporating GPUs, which have allowed models to be 1000x larger and by using more of a consumers data history. I expect them to start yielding improvements in ARPU in the coming quarters.
Why I'm not buying
As explained above, Pinterest has a huge opportunity to increase revenue through increased user growth, higher ARPU and third party partnerships (which hasn't been discussed). However, I don't think Pinterest is a buy at the moment for several reasons.
Global Quarterly ARPU (Stratosphere.io)
First, is the lack of ARPU growth over the last 2 quarters when compared to peers. Over the past 3 years Pinterest has grown ARPU at 11% annually, outpacing that of Meta (+7.6%), suggesting they are making progress, this was demonstrated by faring significantly better over 2022 during a weak ad environment, in fact they were the only platform to grow ARPU that year. However, in 2023, as Meta has started growing ARPU quite significantly by 8.2% in Q2 and 19.3% in Q3. Pinterest has only increased modestly to 3% due to ad pricing pressures. Ad prices were down 20% in Q2, slightly improving in Q3 to 12% thanks to a stabilisation in demand.
At a conference in May 2023, Bill Ready explained that only 10% of advertisers have adopted the new tools released over the prior period; these advertisers are the largest on the platform. Within that 10%; advertisers have seen a 28% increase in conversions and spend has gone up 30% (30% revenue increase). However, this is being offset by the 90% who are decreasing revenue spend by mid single digits year-over-year. This is resulting in roughly a mid single digit increase in spend overall. This explains the lack of improvement, it will be crucial for Pinterest to execute on converting advertisers.
Secondly, Pinterest has experienced high executive turnover since Bill Ready was appointed CEO; with 4 new executives and 2 board of director changes. Although this isn't necessarily a problem, I'd like to see more stability at the top of the company.
Finally, Stock based compensation is very high in comparison to peers at 24% in Q2 2023.
Stock based compensation to revenue (stratosphere.io )
In Q2 2022, management tried to address SBC with a net settlement agreement. However, since that time stock based compensation has continued to rise which I view as concerning.
Revenue per share growth vs revenue growth (stratosphere.io)
This high SBC will result in per share performance being considerably lower than the absolute business performance.
Conclusion
To conclude, Pinterest has a huge opportunity to expand revenue for a long period of time going forward. However, short-term issues such as underperforming ARPU and longer-term issues such as structurally high stock based compensation keep me on the sidelines.
For further details see:
Pinterest: Huge Opportunity But I'm Not Buying