2023-12-28 04:17:42 ET
Summary
- Pinterest's stock has benefitted in recent months from accelerating growth and improving sentiment toward growth stocks.
- Pinterest's stock is no longer an obvious buy based solely on a depressed valuation. The stock should continue to do well though, even without further multiple expansion.
- Improved growth is likely to be sustained, as the platform remains deeply under-monetized. Small gains across users, engagement, ad load and ad pricing will compound to create significant growth.
- Pinterest also has an extremely strong balance sheet, which is likely to be utilized as the company becomes consistently profitable.
Pinterest's (PINS) stock has been buoyed in recent months by a general improvement in sentiment towards growth stocks, along with strengthening fundamentals. Pinterest remains an underappreciated growth story though. There are still many levers that Pinterest can pull (users, engagement, ad load and ad pricing), providing the company with a long growth runway. While the stock is up significantly, and is no longer objectively cheap, Pinterest's margin profile, growth potential and balance sheet support further upside.
Users
Pinterest had 482 million MAUs at the end of the third quarter, an 8% increase YoY. Consistent user growth in recent quarters should have put to rest doubts about the health of Pinterest's platform, supporting the company's valuation.
Growth is primarily occurring outside of North America and Europe though, meaning that user growth will not contribute meaningfully to revenue growth in the near-term.
Figure 1: Pinterest Monthly Active Users (source: Created by author using data from Pinterest)
Gen Z is an area of particular strength, being Pinterest's fastest growing and most engaged user group. This is particularly positive as it suggests that Pinterest's platform is positioned to remain relevant going forward.
Figure 2: Pinterest Gen Z Users and Engagement (source: Pinterest)
Engagement
Engagement with Pinterest's platform is lower than other forms of social media as Pinterest doesn't really have the social element to draw users back in on a regular basis. This will always be a monetization headwind for Pinterest, but it is something the company is working on, with tactics including shifting users towards the mobile app, improving personalization, acquiring relevant content and making the platform more shoppable.
Mobile app users are more engaged than desktop users, supporting impression growth. Mobile app user growth also makes Pinterest less vulnerable to search engine changes. While Pinterest's user base has been fairly stagnant over the past 2 years, the number of mobile users is up significantly, increasing the value of the user base.
Pinterest is also innovating to make content more engaging and shoppable. Pinterest had a focus on creators and video content in 2021, which risked undermining the platform's value proposition. The company has now switched focus back to content that leans into the platform's core visual search and discovery use case.
Pinterest also continues to invest in R&D to make content more engaging. For example, atomization breaks an image into individual elements. This provides Pinterest with deeper insights into user interests, makes the platform more shoppable, and enables users to create collages from image elements.
Figure 5: Pinterest Content Prioritization (source: Pinterest)
These efforts appear to be paying off, with Pinterest generating solid engagement growth in recent quarters.
Figure 6: Pinterest Engagement Growth (source: Pinterest)
Ad load
Pinterest's position as a platform for discovery and shopping means that ads are content, which potentially enables Pinterest to have a significantly higher ad load than other social media platforms. Pinterest believes that the platform could support a multiple of the current ad load, providing the company with a multi-year growth tailwind.
Figure 7: Pinterest Ad Impression Growth (source: Pinterest)
While ad load is likely to be an important value generator over the long run, its near-term impact is currently muted by the fact that Pinterest is currently demand constrained.
Ad Pricing
Users come to Pinterest with active shopping intent, making advertising a natural fit. For example, over 50% of users think of Pinterest as a place to shop. Pinterest still needs to improve its adtech stack and build a larger advertiser base to capitalize on this potential though. Pinterest is currently focusing on lower funnel solutions and gaining access to more demand through partnerships.
Figure 8: Pinterest Monetization Tactics (source: Pinterest)
The move towards targeted advertising and solutions which increase clicks, conversions and attribution should all be supportive of ad pricing over time.
Figure 9: Pinterest Brand and Targeted Advertising Revenue (source: Pinterest)
There is also potential for emerging use cases and an expansion of the advertiser base to increase ad pricing. For example, auto and travel are rapidly growing use cases on Pinterest, both of which are likely relatively high value for advertisers.
Pinterest's shopping strategy has shifted from Pinterest as the retailer to Pinterest partnering with retailers. Shopping is being integrated into core experiences and Pinterest is trying to create a seamless handoff to retail partners instead of driving transactions on Pinterest.
Direct links take users from a Pinterest ad directly to a product purchase experience on the merchant's website in a single click. Early direct link adopters have seen 88% higher outbound click-through rates and a 39% decrease in cost per outbound click. Pinterest has migrated around 60% of its lower funnel revenue to direct links so far and plans on rolling it out to the remaining eligible lower funnel objectives by the end of Q1 2024.
Figure 10: Shift in Pinterest's Shopping Experience Strategy (source: Pinterest)
Amazon Ads is a 41 billion USD business, growing 22% YoY, potentially providing Pinterest with significant incremental ad budgets. The partnership with Amazon requires a multi-quarter implementation period though, with most of the revenue impact expected in early 2024 . The work done with Amazon is expected to lead to faster implementations with future partners.
Third-party demand can improve the balance of supply and demand on the platform, supporting pricing. It can also improve ad relevance, allowing higher ad loads without negatively impacting the user experience. For example, Pinterest estimates that there has been a 50% improvement in the relevance of 3P ads on Search versus current ads. This process is only just beginning, with Pinterest first spreading 3P demand across ad surfaces in the US, before adding more partners and expanding internationally in 2024.
Figure 11: Amazon Ads Partnership (source: Pinterest)
Financial Analysis
Pinterest's third quarter revenue was 763 million USD , up 11% YoY demonstrating a continued growth acceleration. Ad impressions increased 26% YoY, driven by both total impression and ad load growth. This was somewhat offset by a 12% decrease in ad pricing though.
Pinterest believes that the broader advertising environment has stabilized, with retail an area of particular strength. The company has also suggested that it is seeing more traction with larger advertisers. Pinterest's business is also benefitting from improved lower funnel and measurement solutions.
Improving market conditions, alongside internal initiatives, should see pricing begin to stabilize in coming quarters, supporting further growth acceleration. Pinterest expects fourth quarter revenue growth of 11-13% YoY, with guidance accounting for a modest foreign exchange impact.
Figure 12: Pinterest Revenue (source: Created by author using data from Pinterest and The Federal Reserve)
Pinterest's gross profit margins continue to improve, driven by infrastructure efficiencies. International user growth is likely a margin headwind, but increased ad loads and a stabilization of ad pricing should see gross profit margins continue to move higher.
Figure 13: Pinterest Gross Profit Margin (source: Created by author using data from Pinterest)
Pinterest should become highly profitable in time, but both R&D and sales and marketing expenses are currently elevated. The past few years have been a period of heavy investment for Pinterest, with weak market conditions masking improvements in the business. A return to growth, along with a greater focus on costs, should see Pinterest begin to generate consistent profits in coming years.
Figure 14: Pinterest Operating Expenses (source: Created by author using data from company reports)
Conclusion
Most digital advertising companies were hammered by a confluence of events in the wake of COVID. Investor sentiment became so negative that many even convinced themselves that Meta (META) had no terminal value. While many companies are still adjusting to the reality of a privacy focused internet, and macro conditions remain soft, fundamentals have generally been improving and investor sentiment along with it.
I am not expecting too much further multiple expansion from Pinterest, unless growth accelerates to higher levels (30% plus). Continued solid growth and margin expansion should still lead to robust returns for shareholders though, given the company's likely margins at scale. In addition, Pinterest has around 2.3 billion USD of cash and marketable securities on its balance sheet and no debt. With Pinterest set to begin consistently generating profits in coming years, the company will likely begin issuing debt and returning large amounts of cash to shareholders.
For further details see:
Pinterest: Multiple Growth Levers