2023-04-11 18:06:00 ET
Summary
- Shares of Pinterest, Inc. have risen alongside the technology sector in recent months in anticipation of cost-cutting efforts taking effect.
- Some level of operating leverage is likely seen this year; the question is how much.
- I like the set-up, although expectations have risen a bit here, with execution now desired to unleash potential from Pinterest, Inc.
Shares of Pinterest, Inc. ( PINS ) appeared to have found a bottom here. Following a pandemic-induced run higher to levels in the $80s in 2021, shares found a bottom in the high-teens in spring and summer of last year. However, in a rather gradual fashion they have recovered to $28 at the moment of writing.
I looked at the prospects for the shares in October as I concluded that monetization was the name of the game, and while the number of users were down, ARPU continued to grow, still lagging peers in a major way. This lower monetization base and the fact that Pinterest employs a "pull" instead of a "push" model, made me relative upbeat on the shares.
Low monetization and more friendly "approach" to users made me upbeat on the shares in the long run, certainly in comparison to other social networking platforms, which led me to believe that Pinterest is less susceptible to scrutiny from regulators, legislative agencies and consumer groups.
Establishing A Base
Amidst the re-opening of the U.S. economy in 2022, Pinterest guided for a decline in the active user base in the U.S., which freaked out investors. After a spectacular 2021, in which revenues grew 78% in the first quarter, 125% in the second quarter and posted growth rates around 20-40% in the second half of the year.
After a strong 2021, the company was suffering from harsh comparables heading into 2022. First quarter sales rose 18% to $575 million, but the dynamics were not comforting, as the company guided for a 40% increase in the expense base for the year. Second quarter sales were up just 9% as higher expense growth resulted in strong deleveraging on the bottom line.
The 662 million shares awarded the company a $13.2 billion equity valuation at $20 in October, as that valuation included a net cash position of $2.7 billion, for a $10.5 billion operating asset valuation. With sales seen around $2.8 billion that worked down to just a 4 times sales multiple, albeit that the company realistically only would post break-even results.
This looked compelling, but on the other hand there were challenges as well. ARPU kept rising in a soft advertising market, but the issue is that the company spent hundreds of millions to invest in the ecosystem with no user growth to show for it. This was noteworthy, at a time when other platform were cutting costs already, as this strategy invited involvement from Elliott Management as well, which took a 9% stake in the business.
Still believing in the long term hidden potential of the business, I averaged down to $28 at the time, making me a patient holder of the stock.
Stabilizing Trends
Days after offering a cautiously optimistic take in October, the company posted third quarter sales of $685 million, up 8% on the year before. A GAAP operating profit $8 million in this period in 2021 turned into a loss of $69 million over the quarter. In December, the company cut a deal with Elliott, appointing its portfolio manager Marc Steinberg to the board of directors of the company.
In February, Pinterest posted fourth quarter sales of $877 million, up a mere 4% on the year before, entirely driven by a similar increase in the global monthly active user base, with ARPU (combined) coming in flat. The company squeezed out a $6 million GAAP operating profit, but this is not too meaningful as this is typically the strongest quarter of the year. Full year revenues rose from nearly $2.6 billion to $2.8 billion, but a $326 million operating profit in 2021 turned into a GAAP operating loss of $101 million in 2022, marking incredible operating deleverage.
Of interest is the guidance, which the company only provided for the first quarter of 2023. First quarter sales are seen up a low single digit percentage increase on an annual basis. As these revenues came in at $575 million in the first quarter of 2022, I peg these at $575-$600 million for the first quarter of 2023.
Non-GAAP operating expenses are seen down in the low double-digits, but this outlook is provided on a sequential basis. As these expenses came in at $686 million (the sum of R&D, sales and marketing, and general and administrative costs) this might fall to about $600 million. That suggests that break-even levels might be in sight which is actually in line with the first quarter of last year, but it seems that some operational momentum is coming back thanks to costs savings strategies being implemented.
In the meantime the 674 million shares have risen back to $28 per share for an $18.8 billion equity valuation, or $16 billion if we back out net cash. With revenues trending at $3 billion this year (in all likelihood) and earnings realistically coming around the flat line, the situation has not altered dramatically.
Execution is needed and a return of operating leverage, of which the earliest signs are seen, but this still has to work through in the numbers of course. Nonetheless, evidence is showing up that the company is making big decisions on this front, including its plan to sublease San Francisco office space.
And Now?
There is a big potential driver for Pinterest, Inc. in the making, which has not been discussed yet. A ban on TikTok in the U.S. and other Western nations could boost demand for "domestic" social networks, which might benefit the company greatly.
More so the ARPU gap remains enormous which leaves a huge opportunity. U.S. & Canadian ARPU came in at $7.60 per user in the final quarter, while Europe was stuck around $1.01 per user and the rest of the world only came in at $0.14 per user! In fact, the rest of the world category makes up more than half of the total user base of Pinterest, but is responsible for about 4% of sales!
Right now, I reiterate my cautious optimistic tone on Pinterest, Inc. as I did in October, albeit that PINS shares have risen some 40% in the meantime, having jumped from $20 to $28 per share. This optimism makes me more susceptible to sell on moves higher to the thirties, but for now I remain a patient holder of Pinterest, Inc. stock in anticipation of some progress with regard to operating leverage this year.
For further details see:
Pinterest: Stabilization And A Potential Catalyst