2023-03-13 09:00:00 ET
Summary
- PINS has a huge opportunity to better monetize its user base and close the ARPU gap versus competitors.
- The company is significantly under-monetizing international users, who make up the bulk of its user base.
- PINS stock has been the talk of buyout rumors in the past at much higher prices than where it currently trades.
Pinterest ( PINS ) has a huge opportunity ahead of it to better monetize its user base, especially in international markets. Shuffles, meanwhile, adds additional upside optionality.
Company Profile
PINS describes itself as visual inspiration platform that people use to shop products personalized to their taste, find ideas to do offline, and to discover inspiring creators. I like to think of it as an online vision board.
Users, or Pinners, use the platform to find inspiring visual content called Pins, which can be saved and organized into collections. Pinners interact with the platform on several "surfaces." The main way is through the Home Feed, where users can discover several types of Pins: standard (static images that link to web content), video (short videos from businesses that link to web content), product (features items that can be purchased from a retailer’s website), and Ideas (multi-pages of videos, images, texts and lists that are natively created on Pinterest). Machine learning powers the recommendations on the Home Feed.
In addition to the Home Feed, Pinners can also search for Pins, boards, creators and brands via a search bar. They can then choose to see results on an Explore tab or a Shop tab. Search can also be triggered by tapping an image, or by using a lens tool to select specific objects inside a scene. Users can also publish their own content via PINS’s publishing tools.
PINS currently has over 400 million monthly active users (MAUs). According to the company, a "significant majority" of them are women between the ages of 18-64.
How PINS Makes $$$
PINS generates revenue via advertising on its platform, and offers both performance and brand ads. Performance advertising, which represents about 2/3 of PINS’s revenue, is billed when an advertiser optimizes an ad campaign around "performance" objectives like clicks or conversion events. Brand advertising, meanwhile, is billed when an advertiser optimizes an ad campaign around "brand" objectives like impressions or video views.
All advertising is purchased through an auction-based system. Advertisers can base their campaigns on 4 types of user activity: impressions (CPM), clicks [CPC], video views [CPV], and conversion events (oCPM), such as a product being added to a cart. Campaigns, meanwhile, can be targeted toward specific demographics, as well as things such as interests, keywords, or device types. Advertisers can also choose whether to display their ads on PINS’s Home Feed, via Search, or both.
Consumer packaged goods [CPG] companies and retailers were PINS’s initial focus for advertising and these two verticals continue to make up a substantial portion of its revenue. More recently, it has been looking to also cater to the mid-market and smaller advertising across a more wide-ranging set of verticals. As such, it has been looking to expand its use of automation to serve this market.
Opportunities
The biggest opportunity for PINS is that the company is still very much in the early days of monetizing its user base, and the ARPU gap between it and other social media platforms such as SNAP and TWTR is quite large.
Data from Dividend Stock Screener and Company Filings
The gap in international ARPU is even more pronounced, as PINS’s ARPU was for Europe was $3.23 and 43 cents for the Rest of the World. Showing how early in the process of monetizing international users it is, the company only rolled out ads in Japan (a pretty big global market) in Q2 of 2022. Meanwhile, over 75% of its users live outside of North America.
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Spearheading the monetization effort for PINS is new CEO Bill Ready, who took over from founder Ben Silbermann at the end of June. Ready comes from Alphabet ( GOOGL ), where he was President of Commerce, Payments and Next Billion Users. Prior to that, he held several roles at PayPal ( PYPL ), eventually working his way up to COO. He started at PYPL in 2013 after the payments giant acquired his Braintree start-up.
Ready clearly has a background in payments and e-commerce, which nicely dovetails into one of the directions that PINS is headed. At PYPL he was responsible for the customer end-to-to end experience as well as product, technology, and engineering. Meanwhile, at GOOGL, he oversaw the search giant’s commerce and payment ventures.
PINS has been building up its commerce infrastructure over the last few years. Some of its forays include allowing retailers to upload their product catalogs onto the company’s platform; augmented reality [AR] for things like cosmetics and home décor; Shop tags that let Pinners browse in-stock inventory; In-App checkout; and shoppable live-streaming.
At a Morgan Stanley conference earlier this month, Ready addressed PINS' international opportunity, saying:
"In the U.S., the intent to action, the better personalization is driving great results. Better personalization works outside the U.S. as well. Outside the U.S., some of it is very nascent in the ad stack outside the U.S. because we're building more connections into more agencies, more tools for partners outside the U.S., we're seeing that start to pick up as well. So we're not going to get to 50% of the revenue outside the U.S. in the next year or 2, but over the long term, I think we'll start to gravitate more towards that kind of place in the long term, as you've seen from other more mature platforms."
Shuffles
You might be surprised to learn that one the hottest apps this summer was a collage-making app called Shuffles that just happens to be owned by PINS. The app started out as invite-only, before becoming available to the general public in November.
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The app has become particularly popular among Gen Z users who are creating collages that they then set to music and post on other social media sites such as TikTok. Users can build collages through PINS’s photo library as well as by taking their own photos. The app also lets users cut out objects from their photos, and Shuffles will often automatically identify these objects. The objects can then be resized and moved, as well as have animation/motion effects added to them. You can also add text or draw directly onto the board being created.
PINS’s in-house incubator, TwoTwenty, developed the app. The incubator, which is named after the address of the company’s first office, also had a role in developing Pinterest TV.
Buyout Rumors and Activism
PINS has been the subject of buyout rumors for quite a while. According to the Financial Times , in early 2021, Microsoft ( MSFT ) offered to buy the company for $51 billion. That would have been for well over $70 a share. Then in October 2021 , it was reported that PYPL was set to purchase PINS for about $45 billion, or about $70 a share. However, PYPL shareholders balked and the deal fell through.
More recently, there have been rumors stemming from Citron Research that GOOGL is interested in acquiring the social media firm at a price of over $38 per share. Part of their enthusiasm stems from an incident at the CODE Conference where when asked about PINS, GOOGL CEO Sundar Pichai “ froze and began to stutter. ”
A bit more tangible, in July The Wall Street Journal reported that activist investor Elliott Management took a 9% stake in PINS (although its 13-F shows a smaller 4.1% stake).
In a later statement, the firm said: “Pinterest is a highly strategic business with significant potential for growth, and our conviction in the value-creation opportunity at Pinterest today has led us to become the Company's largest investor. As the market-leading platform at the intersection of social media, search and commerce, Pinterest occupies a unique position in the advertising and shopping ecosystems, and CEO Bill Ready is the right leader to oversee Pinterest's next phase of growth. We commend Ben Silbermann and the Board on the leadership transition, and we look forward to continuing our collaborative work with Ben, Bill and the Board as they drive toward realizing Pinterest's full potential.”
Right now, it appears Elliott is supportive of PINS and new CEO Bill Ready, and the two firms came to an agreement in December to add someone from Elliott to the board.
However, the firm isn’t afraid to turn hostile, as it has done in the past with the likes of TWTR and AT&T ( T ). At the former, it forced change at the company’s board, while at the latter it helped convince the company to spin off DirecTV and WarnerMedia. Elliott also isn’t afraid to buy entire companies itself. However, PINS does have a dual-class structure, with Class B holders having approximately 75% of the voting power, with most of those shares in the hands of co-founders Ben Silbermann and Paul Sciarra.
Risks
One of the biggest risks to the PINS is that it is an early monetization story, and there is no guarantee that it will be able to close the user monetization gap between it and other social media players. Probably the biggest argument against PINS achieving a similar ARPU to SNAP or TWTR is that it isn’t as much as a daily-use experience as other platforms.
Working in its favor, however, is that it gives advertisers a much more focused audience that is generally looking to be inspired to buy something. This could be anything from home décor/remodeling, to travel, to food/recipes, to fashion, to cosmetics, to wellness, to wedding planning, etc. The platform also has a lot of short-form video content to help bring users back more often.
A November 2021 article discussing the launch of Pinterest TV from retailTouchpoints noted:
“The new initiative also will help Pinterest and its brand partners capitalize on its incredibly engaged user base: Pinterest users (aka Pinners) spend 2X more than users of other platforms and have 85% bigger baskets at checkout, the company shared.”
PINS is also reliant on the advertising market, and thus susceptible to economic weakness and changes in ad spending. The company is also competing with other media players for both eyeballs and ad dollars. Currently its ad revenue is also heavily dependent on the CPG and retail verticals.
Given this dynamic, PINS could hit a bit of bumpy spot, as its largest advertising verticals face pressure from the combination of a weakening consumer, inflation, and destocking issues. PINS isn’t a cyclical stock per se, but it also isn’t immune from a recession or consumer pullback, as advertisers will likely adjust their budgets.
Another risk is AAPL’s iOS privacy update, whereby users have to opt-in to allow ad-tracking. This has had a negative impact on all players in the social media space. At the start of 2022, Meta Platforms ( META ), for example, said the privacy update would impact its revenue by $10 billion , as the accuracy of ads decrease and measuring outcomes becomes more difficult.
However, PINS' different user experience should help protect it from this risk more than other players. Addressing the issue at a Goldman Conference , CEO Bill Ready said:
“This is one where I think different platforms are in dramatically different places, which is how do you know what to serve up to users. And I spoke earlier about what are the different -- what are the things that are really unique about our platform and having inspiration and intent in the same place. We're very different than other discovery platforms where most other discovery platforms are leaned back, we are going to passively consume content. We have first-party signal. We don't need to track users around the Internet to know what they're interested in. Users come to Pinterest and tell us what they're interested in. That first-party signal, that intent on the platform means that for us to serve what was relevant for users, we're -- we get that signal, we get tremendous first-party signal from users in terms of serving up what's relevant. I think you've seen multiple other platforms that are in the more discovery side of this that don't have that first-party signal are going to really struggle with relevance. And I think we're in a very different place than others on our ability to serve relevance and good personalization from first-party signal.”
Conclusion
PINS has a unique asset with over 400 million monthly users in the early stages of monetization. Central to the bullish thesis is that over time its ARPUs should close the gap with other social media companies. Its platform should be particularly appealing to advertisers given that its users are coming to Pinterest looking for both inspiration and often intent to purchase versus more passive activities such as being entertained, connecting with friends, or catching up on news.
Brand advertising also won’t show up next to content advertising someone’s OnlyFans account either, making PINS one of the safer platform for advertisers. In addition, its user demographics tend to be more affluent and have a larger say in where the household budget is directed.
The company has also shown a strong ability to innovate, with such things as Pinterest TV and Shuffles, as well as introducing other features and tools. The strong start to Shuffles, meanwhile, gives investors a free additional call option at this point.
I view the involvement of Elliott as generally positive at this point, and I do think their involvement has helped prop the stock up a bit. A buyout is also a real possibility – although once again I wouldn’t focus an investment thesis around it.
PINS isn't a screaming bargain at 5.5x forward sales and a 27.5x EV/EBITDA, but the story is that its users will become most more valuable over time - that's why we've seen the high buyout prices that have been tossed around. At current levels, the stock is buy.
For further details see:
Pinterest Is All About Closing The ARPU Gap