2023-11-01 15:20:00 ET
Summary
- Pinterest showcased strong growth in user activity and revenue generation in Q3, with a significant increase in monthly active users and a consistent upward trend in revenue.
- The platform introduced innovative product updates, including a "More Ideas" tab and an enhanced AI recommendation engine, to enhance user experience and engagement.
- Pinterest's strategic focus on becoming a full-funnel platform and its emphasis on the lower end of the marketing funnel position it for sustained revenue growth and provide value to advertisers.
Summary
Pinterest, Inc. ( PINS ) is a visual discovery and bookmarking platform that allows users to explore, save, and categorize images and ideas on virtual pinboards. Catering to both individuals seeking inspiration and businesses aiming to reach a targeted audience, PINS bridges the gap between discovery and action. Users can find ideas on everything from recipes, home decor, fashion, DIY projects, and more. Simultaneously, businesses leverage the platform's unique user intent to advertise products, driving both brand awareness and sales. With its visually rich interface and a focus on personalization through machine learning, PINS has positioned itself as a go-to platform for inspiration, making it a unique player in the social media landscape.
PINS showcased robust expansion in user activity and revenue generation avenues in its third quarter earnings call. The platform's cutting-edge updates, coupled with its emphasis on streamlining the online shopping journey, have fortified its market stance. Additionally, its dedicated approach to serving advertisers, complemented by the rollout of sophisticated advertising solutions, underscores its trajectory for continued growth. When compared with industry peers, PINS's promising outlook and attractive valuation position it as a standout investment, prompting my buy rating for PINS.
Investment thesis
In the third quarter of 2023 , PINS showcased a commendable performance, marking significant milestones in its growth trajectory. The platform's user base expanded, reaching an impressive count of 482 million monthly active users. This represents an 8% increase, underscoring PINS's growing appeal and its ability to attract and retain users. Financially, the company also made notable strides. The total revenue for the quarter stood at $763 million, reflecting 11% growth. This consistent upward trend in revenue is a testament to PINS's robust business model and its effectiveness in monetizing its offerings. Furthermore, the company's financial health was further highlighted by its adjusted EBITDA, which amounted to $185 million. When viewed in terms of margin, this translates to a robust 24%, indicating efficient operations and sound financial management. This performance not only speaks to the company's achievements in this specific quarter but also sets a positive tone for its future endeavors.
In the earnings call , PINS introduced several innovative product updates, aiming to enhance the user experience and engagement on the platform. One of the standout features was the launch of the "More Ideas" tab. Positioned prominently at the top of the home feed, this tab was designed to facilitate users in rediscovering existing interests and exploring new ones across various categories on PINS. This feature acts as a gateway, allowing users to dive back into their board themes and refocus on ongoing projects or interests. Complementing this, PINS's advanced AI recommendation engine has been fine-tuned to offer more personalized content suggestions. By analyzing saved content from user boards, the engine curates and recommends additional pins, providing users with an enriched stream of inspiration. This has led to a notable surge in content savings on the platform.
But the innovations didn't stop there. PINS recognized the growing trend of online shopping and took significant strides to integrate shopping more seamlessly into the user journey. By doing so, they've made it easier for users to transition from finding inspiration to making a purchase. For instance, if a user had previously shown interest in a particular product, like a leather jacket, PINS now offers a personalized carousel on the home feed. This carousel not only resurfaces the same product but also suggests related items, encouraging users to continue and potentially complete their shopping journey. These product enhancements underscore PINS's commitment to creating a more interactive and user-centric platform where inspiration and action go hand in hand.
In the third quarter of 2023, PINS embarked on a strategic journey to enhance its monetization capabilities, aiming to provide more value to advertisers and, in turn, boost its revenue streams. Recognizing the evolving needs of advertisers, PINS has been diligently working to position itself as a full-funnel platform, catering to various stages of the consumer journey, from awareness to conversion. This holistic approach ensures that advertisers can reach potential customers at every touchpoint, maximizing their return on investment.
A significant portion of PINS's revenue, approximately two-thirds, now originates from the lower end of the marketing funnel. This segment is crucial as it focuses on driving tangible results such as clicks, conversions, and customer acquisitions. By honing in on this segment, PINS ensures that advertisers not only raise awareness but also drive sales and customer loyalty.
To amplify its monetization strategies, PINS unveiled a collection of innovative features within its advertising suite. This included diverse ad formats, advanced tools, and precise measurement systems, all tailored to optimize ad efficacy and offer advertisers meaningful data. The underlying objective was straightforward: to guarantee that each ad on the platform is pertinent, captivating, and achieves its intended results. PINS holds a steadfast belief that when ads align with user interests, they not only elevate the overall user experience but also heighten the chances of meeting the advertiser's goals.
Valuation
The target price for PINS based on my model is $30.36. My model assumptions are based on its strong third quarter performance, where PINS reported strong double-digit revenue growth and a notable increase in monthly active users. This growth is supported by the platform's continuous product innovations and the enhanced AI recommendation engine, which have significantly improved user engagement. Additionally, PINS's focus on integrating shopping experiences, like the personalized carousel, emphasizes its commitment to bridging inspiration and purchase actions for users. From a monetization perspective, PINS's strategic shift towards becoming a full-funnel platform and its emphasis on the lower end of the marketing funnel, which now accounts for approximately two-thirds of its revenue, showcase its potential for sustained revenue growth. Furthermore, the introduction of diverse ad formats, advanced tools, and precise measurement systems in its advertising suite underlines PINS's dedication to providing value to advertisers, ensuring ads are both relevant to users and effective in achieving advertisers' objectives.
Peers in the industry include Meta Platforms ( META ). With an EV/Revenue of 5.94x, an anticipated revenue growth rate of 8%, and a gross margin of 80.12%, META sets a benchmark in the sector. In comparison, PINS boasts an EV/Revenue of 5.11x, an expected growth rate of 10%, and a gross margin of 75.48%. Although PINS has a more promising growth trajectory than META, it operates at a slightly lower gross margin. However, I believe that the current ~14% EV/Revenue discount PINS has compared to META's multiple is excessive. I've adjusted this by adding a 10% premium to PINS's current EV/Revenue of 5.11, resulting in an implied gain of 21%. Considering the strengths of PINS that I've previously discussed, I recommend a buy rating for PINS.
Risk
One downside risk to my buy rating for PINS is the intensifying competition in the social media and online advertising spaces. With giants like META and other emerging platforms continuously innovating and expanding their user base, PINS might face challenges in retaining and growing its user engagement. If these competitors offer more advanced features, better user experiences, or more effective advertising solutions, it could lead to a slower growth rate for PINS or even a decline in its active users. This competitive landscape could impact PINS's revenue growth and profitability, potentially affecting its stock performance.
Conclusion
PINS's performance in the third quarter of 2023 was exemplary, reflecting its strong growth trajectory and ability to attract and retain users. The platform's innovative product updates and enhanced AI recommendation engine have significantly improved user engagement and experience. Recognizing the surge in online shopping trends, PINS has seamlessly integrated shopping experiences, bridging the gap between inspiration and purchase. On the monetization front, PINS's strategic focus on becoming a full-funnel platform ensures advertisers achieve tangible results, from raising awareness to driving sales. The company's commitment to optimizing ad efficacy and aligning ads with user interests further solidifies its position in the industry. When compared to industry peers, PINS's promising growth trajectory, combined with its undervalued EV/revenue, presents a compelling investment opportunity. Given these strengths and its potential for future growth, I recommend a buy rating for PINS.
For further details see:
Pinterest, Inc.: Impressive Q3 Performance With A Promising Growth Forecast