2023-09-08 07:04:49 ET
Summary
- Pinterest partners with Amazon to boost shoppable content and advertising.
- Pinterest has untapped potential to boost revenue through optimizing ad load and focusing on lower-funnel conversions.
- Despite short-term challenges, Pinterest shows promising signs of user growth and untapped revenue potential for the long term.
- Based on growth projections, PINS offers a 9% CAGR over 5 years.
Investment Thesis
In my view, Pinterest Inc. (PINS) is a stock to keep on hold for now. Its recent alliance with Amazon offers a promising avenue for enhancing its shoppable content and ad revenues. This opportunity is particularly compelling given Pinterest's yet-to-be-fully-exploited potential in areas like ad load optimization and targeting lower-funnel conversions. However, the company is not without its challenges, including a slowdown in user growth and a difficult macro-economic landscape. Projections suggest a potential 9% CAGR for the stock over the next five years, which might be satisfactory for some investors. Nonetheless, there could be other investment options in the market that present a more favorable risk-to-reward ratio. As such, while Pinterest has considerable upside, it remains on my watchlist until a more opportune entry point emerges.
Company Overview
In my opinion, Pinterest operates as a visual discovery engine, where users can find inspiration for various aspects of their lives such as fashion, home decor, and recipes. The platform allows users to "pin" images and ideas to virtual boards, making it easier to organize and revisit content. PINS primarily generates revenue through advertising. Businesses pay to promote their pins, which are then displayed in a targeted manner to users who are likely interested in those products or services. The company also offers shopping ads that allow users to purchase products directly through the platform.
PINS faces competition from various social media and e-commerce platforms, including Instagram (META), and Amazon (AMZN). These platforms also offer targeted advertising opportunities and have a broader user base, making them strong competitors. However, Pinterest differentiates itself by focusing on inspiration and discovery, rather than social interaction, which appeals to a specific demographic of users.
Pinterest and Amazon Join Forces
Pinterest have announced a significant partnership with Amazon to open up third-party ad demand on its platform. As Pinterest continues to see growing user engagement with its shoppable content, this collaboration aims to bring more brands and relevant products to Pinterest users, while also offering a seamless on-Amazon buying experience. The partnership is expected to roll out in multiple phases, starting later in 2023.
In my opinion, this is a strategic move for Pinterest, which already has a monthly user base of over 463 million people focused on inspiration and discovery. The collaboration with Amazon will likely enhance the platform's shoppability, aligning with Pinterest's goal of making every Pin shoppable. This could significantly boost Pinterest's advertising revenue by attracting more brands and advertisers who want to connect with users having high commercial intent.
Bill Ready, CEO of Pinterest, emphasized that the partnership would provide a best-in-class buying experience for users and greater performance metrics for brands and advertisers. Paul Kotas, SVP at Amazon, also expressed enthusiasm about providing differentiated value for brands through shoppable content. Overall, I believe the partnership could be a game-changer for Pinterest, helping it to scale its efforts in connecting users with brands and products, thereby realizing more value from its large and engaged user base.
Unlocking Pinterest's Monetization Potential
In my opinion and as stated by PINS management team, there are two critical avenues for Pinterest to unlock its underutilized monetization potential. First, I believe the concept of "ad load" is particularly intriguing. Unlike other social platforms that are entertainment-centric and have limitations on the number of ads they can show, Pinterest has a unique advantage. Given its commercial context and the relevance of ads to user intent, Pinterest could theoretically increase its ad load from the current 1 in 5 slots to as much as 60-70% . This suggests that Pinterest could substantially boost its revenue without needing to expand its user base or engagement metrics, simply by optimizing the number of ads displayed.
Secondly, the shift from "upper funnel impressions" to "lower funnel conversions" is another promising avenue. In my view, focusing on lower funnel conversions, which are more lucrative and can pay up to 5 times more than upper funnel impressions, could be a game-changer for Pinterest's monetization strategy. By targeting ads that are closer to the point of purchase, Pinterest could significantly elevate its revenue per unit of user intent.
Overall, I believe Pinterest has considerable untapped potential for revenue growth, both through increasing ad load and by shifting towards more conversion-based advertising.
PINS Current Headwinds
In my opinion, Pinterest is currently navigating through what are likely short-term headwinds that have impacted its performance. The company's monthly active user growth was only an 8% YoY increase in Q2 2023, though it is now trending in a positive direction compared to 2022.
Additionally, its revenue for the same quarter grew by just 6% YoY, and the average revenue per user decreased by 1% YoY.
These figures indicate a challenging period for Pinterest, but it's crucial to consider the broader context. The company's recent performance can be attributed to tougher than usual macro-economic conditions, including softer advertising demand due to overall business sentiment, reduced advertising spend, and fears of a recession.
However, it's worth noting that the company's monthly active user growth rate is showing signs of recovery. While these challenges are concerning in the short term, they don't necessarily reflect on Pinterest's long-term potential or its intrinsic value. The company has significant untapped avenues for revenue growth, such as optimizing its ad load and focusing on more lucrative lower-funnel conversions. Therefore, despite the current headwinds, Pinterest's long-term prospects for revenue growth remain promising.
Financial Analysis
Over the past 5 years, the company has demonstrated respectable financial performance. Its revenue has shown a consistent and strong growth, increasing from $755.93 million in 2018 to $2,872.37 million in the last 12 months in 2023, representing a compound annual growth rate of approximately 30%.
Losses in terms of GAAP earnings per share have been narrowing over the past 5 years as the business continues to reach scale, where GAAP EPS in 2018 was -$0.50 and in the last twelve months the GAAP EPS was -$0.43. Since 2020 the company has been free cash flow positive, producing $370 million in the last 12 months. As a result, in the past few years, PINS have also dramatically reduced the rate of share dilution. I believe the free cash flow decreases seen since 2021 reflect the change in macro-economic conditions and I think over time free cash flow will grow alongside the monetization initiatives being implemented by management.
As of the most recent quarter, the company reported cash and cash equivalents of $2,295.41 million . The company's total debt stands at $0, an amount that reflects the company's conservative approach to leverage. The company's current ratio, a measure of its ability to cover short-term liabilities with short-term assets, is 9.19, which is generally considered very healthy. Overall, PINS has a pristine balance sheet and should be resilient throughout any business environment.
I expect PINS upcoming quarterly earnings results to be below their best, I think that they will probably achieve about 9% revenue growth, much below their 5-year average attributed to tougher than usual macro-economic conditions, including softer advertising demand due to overall business sentiment, reduced advertising spend, and fears of a recession.
Looking beyond the next 12 months, assuming a return to favorable macroeconomic conditions, the company should experience accelerated strong growth as a result of the Amazon partnership, the untapped monetization driven by increased ad load and a shift from "upper funnel impressions" to "lower funnel conversions".
Valuation
When considering valuation, I always consider what we are paying for the business (the market capitalisation) versus what we are getting (the underlying business fundamentals and future earnings). I believe a reliable way of measuring what you get versus what you pay is by conducting a discounted cashflow analysis of the business as seen below.
PINS current TTM Cashflow per Share as of Q2, 2023 is $0.55. Based off the Amazon partnership, the monetization initiatives, and an eventual return to more favourable macro conditions, I believe that PINS Cashflow per Share should grow at about 20% annually for the next five years. Therefore, once factoring in the growth rate by Q2 2028 PINS Cashflow per Share is expected to be $1.37. If we then apply an exit multiple of 25, this infers a price target in five years of $42.32. Therefore, based on these estimations, if you were to buy PINS at today's share price of $27.65, this would result in a CAGR of 9% over the next five years.
Therefore, if you believe an 9% annual return is acceptable you may want to consider a position in this stock, however in my opinion there are better opportunities in the market that present a better risk/reward profile, hence I have this stock as a hold. For now PINS will stay on my watchlist, as I hope for a better entry point.
Conclusion
Pinterest's recent partnership with Amazon is a strategic move aimed at boosting shoppable content and advertising on the platform. This collaboration aligns well with Pinterest's untapped potential to increase revenue through optimizing its ad load and focusing on more lucrative lower-funnel conversions. Despite facing short-term headwinds, such as slower user growth and challenging macro-economic conditions, the company shows promising signs for long-term revenue growth and user engagement. Moreover, based on growth projections, Pinterest's stock offers a potential Compound Annual Growth Rate of 9% over the next five years. While this may be an acceptable return for some investors, it's worth noting that there may be other opportunities in the market with a better risk/reward profile. Therefore, although Pinterest remains a company with significant growth potential, it currently sits on the watchlist for those waiting for a more favorable entry point.
For further details see:
Pinterest Partners With Amazon To Overcome Short-Term Challenges And Unlock Untapped Growth