2023-04-28 11:43:22 ET
Summary
- User engagement is improving rapidly and MAU growth has returned to near the pre-COVID trend, demonstrating the long-term health of the platform.
- Pinterest continues to improve its advertising solutions, which remain immature relative to peers. This will support ARPU when the demand environment improves.
- Ad spend is weak and is likely to remain so for the foreseeable future, which will probably limit near-term share price gains.
Pinterest's (PINS) stock has been fairly flat over the past 12 months, but business fundamentals have shifted significantly over that time. A year ago there were serious questions being raised about the long-term viability of the platform due to user retention issues. User growth is now healthy, but Pinterest is facing a weak demand environment, delaying a return to strong revenue growth. While the near term will likely remain difficult, Pinterest has a bright future and the stock is modestly valued.
Pinterest continues to make progress on user engagement, which previously was one of the biggest criticisms of the company. Mobile app users account for more than 80% of total impressions and are Pinterest's most important users. Mobile app user growth in the US and Canada accelerated to 7% in the first quarter. Mobile app user revenue grew 16% YoY in the first quarter.
Improved engagement has helped Pinterest to deliver more ads and create more favorable pricing for advertisers. Pinterest managed to increase ad impressions by over 30% in the first quarter while driving up engagement. Pinterest's ad marketplace is also becoming more efficient, leading to an 8% reduction in CPAs for performance advertisers. Advertisers that are utilizing Pinterest's measurement solutions are finding that ad performance on the platform is better than they had realized, which should lead to increased demand over time.
In recent periods Pinterest has evolved from being supply constrained to demand constrained. As a result, Pinterest believes that third-party ad demand could be a significant opportunity. Amazon (AMZN) is the first partner being brought onto Pinterest, as they offer a breadth of relevant shoppable ad content paired with a seamless consumer buying experience. This refers to Amazon's ad platform, rather than just Amazon's retail business advertising through Pinterest.
Pinterest also continues to improve its ad tech, which should lead to improved monetization in time. Pinterest launched Premiere Spotlight in the first quarter of 2023, a premium awareness solution that showcases brands with exclusive placement on Pinterest's search page. On average Premiere Spotlight is demonstrating higher click-through rates compared to standard video awareness ads. Mobile deep linking was launched in Q3 2022 and was the primary contributor to shopping revenue growth in the first quarter, which was up 40% YoY. Pinterest also continues to make progress on providing conversion visibility. Pinterest's conversion API was recently integrated with Tealium to drive further adoption. Pinterest is also in the process of onboarding advertisers like Wayfair (W) onto its clean room solution.
Video also continues to be an important part of the Pinterest story, but unlike other platforms, it is a growth tailwind rather than a headwind. This is because revenue from videos makes an outsized contribution relative to the time spent viewing videos. Video content on Pinterest increased by nearly 40% QoQ in the first quarter. Pinterest announced a publisher deal with Dotdash Meredith to provide content across lifestyle, fashion, and food categories with brands including better homes and gardens, brides, food and wine, and all recipes.
Revenue increased by roughly 6% on a constant currency basis in the first quarter. In recent periods Pinterest has struggled with weak user numbers and has been supply constrained in regards to ad inventory. With the pandemic now firmly in the rearview mirror, user numbers and engagement are increasing strongly, but advertiser demand is soft due to macro uncertainty. While this situation may take time to resolve, Pinterest's growth is likely to accelerate substantially when it does.
Figure 1: Pinterest Revenue Growth (source: Created by author using data from Pinterest)
Pinterest's user growth has now returned to roughly the pre-pandemic trend, which should put to bed the ridiculous notion that the platform is in terminal decline. User numbers are now growing solidly, with mobile user growth outpacing overall user growth. Gen Z users increased by double digits YoY in the first quarter, and continue to be the fastest growing demographic on the platform. Measures of engagement (impressions, sessions and time) also continue to significantly outpace overall user growth.
Figure 2: Pinterest Monthly Active Users (source: Created by author using data from Pinterest) Figure 3: "Pinterest" Search Interest (source: Created by author using data from Google Trends)
Improved monetization of users outside of North America remains one of Pinterest's largest opportunities. While some of these users are currently under monetized, many of them are not monetized at all. Pinterest's focus on first-party demand is probably one of the reasons that international APRUs have been slow to increase, but with a shift in focus to third-party demand, this could change.
Figure 4: Pinterest ARPU (source: Created by author using data from Pinterest)
Pinterest's gross margins continue to decline, although the company has been working on reducing infrastructure costs. Some of this is likely the result of the demand environment, with potential contributions from the increase in video content and growth in under monetized international users. A rebound in ad spend should return Pinterest's gross profit margins to near 80% though, particularly as ARPU's outside of North America increase.
Pinterest recently embarked on a restructuring campaign to reduce costs, which included a reduction in real estate footprint and a 4% workforce reduction . This was a large contributor to costs in the first quarter though, making Pinterest's operating loss look worse than it actually was. Pinterest still has work to do to control costs, but the business should be highly profitable at scale in a normal demand environment.
Table 1: Pinterest Operating Expenses (source: Created by author using data from Pinterest) Figure 5: Pinterest Profit Margins (source: Created by author using data from Pinterest) Pinterest Operating Expenses (source: Created by author using data from Pinterest) Figure 7: Pinterest Job Openings (source: Revealera.com)
Pinterest's business continues to struggle due to the weak demand environment, but the fundamentals of the business have improved significantly over the past 12 months. Pinterest is well positioned to benefit when the market eventually recovers, but this could take time. In the meantime, Pinterest needs to demonstrate progress in shopping and monetizing international users.
For further details see:
Pinterest: Shifting Narrative