2023-12-08 10:15:53 ET
Summary
- Pinterest reported strong Q3 results led by Europe, which saw nice increases in average revenue per user (ARPU) and monthly active users (MAUs).
- The company also has done a great job of improving gross margins and keeping operating expenses in check.
- Pinterest has had a strong run, but now looks fairly valued.
Back in March , I placed a “Buy” rating on Pinterest ( PINS ), saying the company has a huge opportunity to better monetize its user base, especially in international market. More recently ahead of its Q3 earnings , I reiterated that view while noting the company has done a very nice job of innovation under CEO William Ready, who took over last year. With the stock up 45% from my original write-up and about 30% since my last article, let’s take a closer look at the name and its most recent earnings, reported at the end of October .
Company Profile
As a reminder, PINS operates a visual inspiration platform that is akin to an online vision board that helps users find and shop products and experiences based on their style. Users, or Pinners, search, save, and organize visual content called Pins, which can be anything from static images, to videos, to products, etc., into collections. Machine learnings, meanwhile, helps makes recommendations,
Most of PINS' revenue comes from advertising. Performance advertising makes up approximately two-thirds of its revenue, with brand advertising accounting for the rest. Advertisers campaigns can be based on things such as impressions (CPM), clicks [CPC], video views [CPV], and conversion events (oCPM).
Q3 Results
For its most recent quarter, PINS turned in strong results. Revenue grew 11.5% to $763.2 million. That easily topped the analyst consensus calling for revenue of $743.3 million.
Europe led the way with 33% revenue growth, or 25% in constant currencies, to $114 million, while U.S. & Canada revenue grew 8% to $618 million. Rest of World revenue climbed 29%, or 28% in constant currencies, to $31 million.
Global Monthly Active Users (MAUs) jumped 8% year over year to 482 million from 445 million users and were up 4% sequentially from 465 million users.
Europe grew MAUs by 8% to 128 million, while the U.S. & Canada saw MAUs rise 1% to 96 million users. Rest of Word users jumped 12% to 258 million active users.
PINS said Gen-Z users are its fastest growing and most engaged demographic.
Average revenue per user rose 3% to $1.61. Europe once again led the way, with ARPU grow of 26% to 91 cents. European ARPU was flat sequentially. U.S. & Canada ARPU rose 5% year over year to $6.46 from $6.13, and was up 9% sequentially from $5.92 in Q2. Rest of World ARPU increased 16% to 12 cents from 11 cents and was flat quarter over quarter.
The company said its increased ARPU stems from making the platform more valuable to advertisers, as it’s made innovations in its ad stack across formats, tools and measurement solutions. It specifically called out mobile deep links (MDL) and direct links. It is seeing a 235% lift in conversion rates and 35% improvement in CPAs with advertisers that are using MDL. Direct links, meanwhile, have been seeing an 88% higher outbound click-through rates and a -39% decrease in cost per outbound click for CPC campaigns. Direct links have now been rolled out to about 60% of its lower funnel revenue opportunities.
PINS was able to keep costs in check, with adjusted sales & marketing costs down -2% to $200 million, and adjusted G&A expenses lower by -3% to $63 million. Gross margins, meanwhile, improved to 77.6% from 73.3%. Adjusted numbers exclude stock-based compensation.
PINS saw its adjusted EBITDA soar 139% to $184.7 million. Stock comp was $179.1 million.
Turning to the balance sheet, PINS ended the quarter with $2.3 billion of cash and marketable securities and zero debt.
Looking ahead, the company forecast Q4 revenue to grow between 11-13%. It expects adjusted operating expenses, meanwhile, to decline by -9% to -13%. It is also looking for significant Q4 adjusted EBITDA margin expansion and for 600 basis points of adjusted EBITDA margin expansion for the year.
On its Q3 earnings call, CEO William Ready said:
“We know more than half our users view Pinterest as a place to shop, so our focus over the last year has been to make Pinterest more shoppable. When users are in a commercial mindset, we can drive better engagement through highly relevant ads, and we can grow monetization by delivering more views, clicks and conversions and customers to our advertising partners, thereby fueling our flywheel for engagement and revenue growth. This ability to have a full funnel for users and advertisers on the same platform provides compounding benefits to both parties and is one of our core differentiators. We also laid out our financial targets for the future, where we expect to drive revenue growth at a mid- to high-teens compound annual growth rate and expand our adjusted EBITDA margins to reach the low 30% range in the next 3 to 5 years. We plan to achieve this by focusing on 3 key priorities: growing users and deepening engagement per user, improving monetization, and delivering profitable growth through operational rigor. … Let's start with our work on growing users and deepening engagement. We continue to use AI to improve the relevance and personalization of our content recommendations and satisfy user intent on our platform through improved shopping experiences.”
PINS turned in an impressive quarter on a number of fronts. APRU improvements, especially in international markets, is something I’ve discussed as a big opportunity for the company, and it delivered strong growth on this front in Q3. Europe was particularly strong, but the company also saw a nice rebound in its North American ARPU as well. The innovations the company has made clearly appear to be resonating with advertisers.
The company also saw strong MAU growth, especially out of Europe. North America and Europe have been pretty static on this front, so seeing some nice growth this quarter was a nice positive. Europe has bounced around a bit, so we’ll have to see if these gains stick, but it was a nice to see solid gains here.
PINS also have to be commended for its work on the cost side. It was nicely able to increase its gross margins, while keeping all its expense items in check. The one negative I’d call out is the company’s high stock-based compensation expense, which eats into most of its adjusted EBITDA.
Valuation
PINS stock currently trades around 31.1x the 2023 consensus EBITDA of $674.4 million and about 23.8x the 2024 consensus of $881.0 million. Based on 2025 estimates of $1.16 billion, it trades at 18.1x.
It trades at a forward PE of nearly 33x the 2023 consensus of $1.05 and just nearly 27x the 2024 consensus of $1.29.
Revenue growth is expected to be 9.2% this year, and then grow around 14-18% a year over the next few years.
Outside of Snap ( SNAP ), PINS trades a large EV/EBITDA premium compared to its peer group.
From an MAU perspective, each MAU is worth about $43.50. By comparison, each Facebook MAU is worth about $260, while a SNAP MAU is worth about $32 (as last disclosed).
Given Facebook’s much better monetization it should be no surprise its users are worth a lot more, while SNAP has had a lot of issues over the past year or so.
With Facebook having an ARPU that is 7x higher than PINS, on a MAU-ARPU basis, the equivalent valuation for PINS would be about $37 per MAU. Throw in a 20% premium for its potential to somewhat close that monetization gap and because it has the potential to be acquired, and I could place a $45 value per MAU on PINS, which would equate to a target price of $35.50.
Given its high stock comp, I prefer using this method to value PINS versus an EV/EBITDA method.
Conclusion
For now, I think my thesis for PINS has largely played out in the near term. The company has done a very nice job growing its ARPU across regions, while re-igniting some MUA growth as well, while at the same time keeping costs in check.
At the same time, I think the stock is pretty close to my fair value on the name, and I can’t just ignore its high stock-comp, which wipes out most of its adjusted EBITDA if considered an actual expense. As such, I’ve going to lower my rating to “Hold” based on valuation.
For further details see:
Pinterest: Taking To Hold After Strong Performance (Downgrade)