All,
Upfront I will say I am very bullish on Pinterest (PINS) and was previously uneducated on Etsy (ETSY). Since I recently had a lot of free time for investment research and everyone on the board has been gaga over ETSY, I figured I would finally take a look. I didn’t have to go too deep to realize this is not a company I would like to invest in. Below I hope to explain why concisely and then contrast it with Pinterest.
ETSY
Etsy is a unique marketplace which allows sellers to sell items to buyers. Their marketplace makes money from: listing fees, transaction fees, payments platform, and offsite ads transaction fees. Their services makes money from: advertising - Etsy ads and bump, shipping labels, and other. I see this as a problem right off the bat because their sales only increase by 1) increase # of sellers, 2) higher fees for the sellers, or 3) increase # of buyers. Some changes were implemented when the new non-founder CEO Josh Silverman took control (https://www.change.org/p/etsy-josh-silverman-ceo-etsy-please…). One could certainly brush off the allegations in the website but I have first-hand experience from my brother and sister-in-law who were able to use Etsy as their sole income because their shop was one of the top rated shops and the changes listed in the link crippled them requiring them to seek out other employment; Etsy income for them is now ~30% what it was. Keep in mind this is just one anecdote but it speaks volumes to the mindset of the leadership.
Looking through their investor presentation, one chart on slide 21 tells the whole story (GMS = Gross Merchandise Sales); see summary of chart in table below. How can someone say that this is not a COVID play? I am sure they have gained a lot of people who are going to be repeat shoppers, and I am sure their international expansion is going well, but the bottom line is that this growth is not sustainable, no matter how you spin it. This isn’t a service like Facebook where people come and stay, this is an ecommerce platform where people come to shop every now and again. If there are other revenue steams and income expansion that I am missing, please bring it to my attention.
**FY 2017** **FY 2018** **FY 2019** **FY 2020**
**GMS (M)** 3,254 3,932 4,975 10,281
**% Diff** - 20.8% 26.5% 106.7%
Something else of note: Debt/Equity = 59% (but they do have a sufficient cash position to cover the debt).
I would certainly not call this a deep dive but I dove deep enough to assure myself that this is not a place where I want my money to be, especially when there are so many great companies out there, many of which are discussed on this board, who got a sustained boost from COVID.
PINS
This is a founder-led, transparent, no-nonsense company firing on all cylinders. Pinterest’s mission statement is to bring everyone the inspiration to create the life they love. They are going about this is so many different ways that I wish I could get a time machine and see what this company is doing 5 years down the road. Their main income is from advertising. People misclassify them as a social media website but think about it, when you advertise on Facebook you are pretty much shooting in the dark. When you advertise on Pinterest, you know exactly what that user has been searching for, what renovations they have been researching, what type of cooking they have been diving into, etc; this is not a shot in the dark but a deeply targeted advertisement which demands a higher premium from the advertiser. On Pinterest you search to better yourself, on Facebook/Twitter/etc you connect to see what others are doing.
Their growth recently has come from 1) automated advertising, 2) making Pinterest more shoppable, 3) international monetization. Q4 saw almost half of the advertising spend go through automated bidding which they only introduced a few quarters ago. Pinterest has a deal with Shopify so Pinners can go straight from Pinterest searches to purchasing through Shopify. Shopping will be greatly expanded over the coming quarters.
Here is my favorite stat to tout. International users make up 78.6% of the user base but only 17.4% of the revenue. Average Revenue Per User in the US is $5.94 while international ARPU is $0.35. This isn’t because they can’t make enough money internationally, it is because they haven’t monetized them yet. Pinterest has spent a lot of time monetizing Europe and is planning to begin monetization of Latin America 1H2021. I am not about to say that international ARPU can get to the levels of US ARPU, but they certainly have a long runway ahead of them.
See table below for why this is not a COVID spike (MAU=Monthly Active User). I put the % YoY values here because this business is seasonal with Q3 being good and Q4 being great. You can clearly see a COVID bump between Q1-20 and Q2-20 but this is not the kind of bump that would make me thing the business is relying on COVID (see Etsy table above). As already mentioned, even if the MAUs stayed constant or decreased, their ARPU is increasing because of all of the innovations they are incorporating into the business to make advertising more efficient, lead Pinners to purchases based on what they are researching, and increase in international monetization. They are even talking about allowing Pinner to monetize instructional videos on how to cook, do origami, stitch, etc.
**Q4-18** **Q1-19** **Q2-19** **Q3-19** **Q4-19** **Q1-20** **Q2-20** **Q3-20** **Q4-20**
**USA MAU** 82 85 85 87 88 90 96 98 98
**% YoY** - - - - 7.3% 5.9% 12.9% 12.6% 11.4%
**INT MAU** 184 206 215 235 247 277 321 343 361
**% YoY** - - - - 34.2% 34.5% 49.3% 46.0% 46.2%
No debt, $1.760 B cash position.
Conclusion
Both ETSY and PINS seem like great businesses and both will most likely succeed. I view ETSY as having gotten a huge, temporary boost from COVID and will have a tough time continuing to increase revenue (already going down the M&A route). Pinterest had a moderate bump from COVID but has a huge runway ahead of them which will increase current revenue streams all while introducing new ones concurrently. It is actually pretty comical that I am so bullish on Pinterest because initially I wasn’t interested but as you research them more and more, you see clearly how this company can become a real behemoth.
Please do your own research, I could be wrong on all accounts :). This is not all encompassing but is only meant to present a story of the two companies for the purposes of comparison.
-Junomean2
Long PINS