Pinterest Q4 2019

Investment Analysis Clubs Saul’s Investing Discussions
1

Q4 Revenue growth: 46%
2020 Guidance 33%


Revenue   
Year      Q1      Q2      Q3      Q4
2018     131.4   161.2   190.2   273.2
2019     201.9   261.2   279.7   399.9

This is not an ultra-grower, but here’s why I think they will grow revenue more than 33% in 2020: International.

Of the $1.143 billion revenue PINS brought in for 2019, $1.026 billion was US revenue and $117 million was International. But the US revenue grew 43% and International revenue grew 187%. In Q4 US grew 36% and International grew 202%. Woah.

It gets even better. 74% of Pinterest’s MAU’s (monthly active users) are International. And they’re growing much faster than US MAU’s.

US MAU’s (Monthly Active Users): 88 million (growing at 8%)
International MAU’s: 247 million (growing at 35%)

So why the heck is International revenue so small? ARPU.


US ARPU (Avg Revenue per user)
Year      Q1      Q2      Q3      Q4
2018     1.59    1.98    2.33    3.16
2019     2.25    2.80    2.93    4.00

International ARPU
Year      Q1      Q2      Q3      Q4
2018     .05     .05     .06     .09
2019     .08     .11     .13     .21

As you can see, International ARPU is tiny compared to US. There is a huge runway ahead. And US ARPU was up 34% in just a year, which is fantastic, but International ARPU was up 115%. International was up 122% in Q4. With such a small base still, it’s easy to see how it could more than double again in 2020.

If International ARPU had been even half of US ARPU in 2019, total revenue for PINS would have been more like $2.5 billion instead of $1.1 billion. That’s not in the cards soon, but it illustrates the potential.

What about Profitability?

Q4 Gross Margin: 76%


Non-GAAP Net Inc/Loss
Year      Q1      Q2      Q3      Q4
2018    -47.8   -34.2   -14.9    49.5      
2019    -40.4   -24.5     6.0    76.9

So they were profitable in 2019 by a tiny amount, but profits will rise sharply in the coming years with International ARPU.

And valuation?

Mkt Cap: $14 billion
TTM Revenue: $1.143 billion

So their PS is around 12.

Bottom line: I think they’re undervalued. If they were only their US business, a $1 billion+ revenue stream still growing at 30%+, a PS of 12 would be reasonable if not downright attractive. But with the enormous potential they have with International acting as basically a free-roll on top of that US business, I think PINS is a steal.

I doubled my position this morning at $24.65, but it’s still only about 3%. I’ll be considering adding more, and of course I’ll be watching the International ARPU to see if they can continue growing it rapidly.

Bear

46 Likes
2

Bear, you interested me but this is a very strange picture. You have a static number of US users with a large Annual Revenue per User of $4.00, up from $3.16, and a rapidly growing number of international users, much larger than the number of US users, but it’s not monetized at all, with ARPU of only 21 cents, up from 9 cents, pretty much irrelevant.

Let’s look at this: Monthly users in the US in millions have been 85 million, 85 million, 87 million, 88 million, for the last four quarters. That’s as close to zero growth as I’d ever want to see. Why aren’t they growing? But they are bringing in all this revenue per customer.

Then we have monthly international users of 206 million, 215 million, 235 million, 247 million, in the same four quarters, with almost zero revenue per customer.

So what the heck is going on? Why have US customers stopped growing? Why are international customers growing so fast? Why aren’t they monetizing them the way they did with the US subscribers? It’s like they are running two different unrelated businesses. Can you explain this a little.

Saul

21 Likes
3

So what the heck is going on? Why have US customers stopped growing? Why are international customers growing so fast?

The US has about 330 million people, so they’ve got 27% of them. Pretty crazy penetration.

The world has about 7.7 billion people, so they’ve only tapped 3% of that market.

Why aren’t they monetizing them the way they did with the US subscribers? It’s like they are running two different unrelated businesses. Can you explain this a little.

They started later – it was a strategy. The CFO said on the CC:
I mean, we, just started in the last year to take international monetization seriously and we focused our efforts on Western Europe and English speaking countries outside of the U.S.
…[In the US] we were proving the playbook, worked in the U.S. for a few years, and then began to monetize internationally.
…the only real difference that I see is the pricing opportunity, which reflects the depth of ads spend in those markets.

Bear

16 Likes
4

I have been in and out of PINS for a while. This Q results have certainly brought me back in and I think I will hold / increase my stake from here… (added some more today)

To address some of the points Saul mentioned, here is my take.

I understand that historically, this company has focused on making better platform for users and less efforts spent on monetization.
This is due to background of two co-founders with Goole and Facebook. Remember both these companies had strong user growth and monetization came in much later.

This is changing since last two years as they hired and experienced operator Francois Brougher as COO with experience at Google and Square. So far they are very successful increasing monetization at rapid pace in the US. Their international monetization is in very early stage with really a only couple of countries in Europe contributing today to revenue. They are rapidly expanding efforts to monetize internationally but their platform usage is growing at a much higher rate which makes international ARPU look really small. The way I see, this is a good problem to have and their monetization efforts will continue to bear fruit for a looong time.

Little more color - there are four parts of PINS growth.

  • US users: I think this is very near saturation, this will not grow at any higher rate… the reason is PINS primarily popular among women today. I believe it is attracting men but it is slow…

  • US monetization / ARPU at $4 has a large room to grow… comparable platforms (social media like FB, TWTR and instagram) have much higher ARPU all the way to ~$25 for FB. While people wont spend as much time on PINS year around as they spend on FB, that means lower ad inventory… however, people spend more intense time searching for things to buy… decorate living room, ideas for picnic… you name it… so the platform has higher monetization value for advertisers than real social platforms like FB for example.

I believe PINS has room to get to $8, may be even $10 ARPU for US users… this means the current 25% CAGR will likely sustain for few more years

  • International users: They are finding users growing everywhere… great testimony that platform is real and sustainable

  • International monetization - user growth is much faster than their ability to set up offices and sell ad inventory… they are rapidly establishing offices in various countries to get better monetization. At the end, I would think international ARPU would settle somewhere between $1 to $2… which means 5x to 10x from here…

So to summarize; I see US revenue has room to double from here and international revenue has room to go 10x from here.
There is upside to these numbers in my opinion.

Big question is at what rate can this grow… this is a hard one… I dont think anyone can claim that revenue growth will accelerate because the base is already very large at $1.1B TTM…

My stake in the ground is current rate of revenue growth of 35% to 40% is sustainable for at-least next 3 years… more like 5 years…

And at gross margins of ~70% and PS of ~12 today, even after recent run-up, I believe there is a room for stock price to double or even triple from here in a couple of years…

31 Likes
5

Bear… thanks for starting the thread…
I am glad you are increasing position as I thought I am the only one on the board into PINS!

I have to say, the earnings call was fantastic this quarter (though the last quarter call was a bit blah to me)

I recommend anyone interested in PINS to go through the call and the thesis as PINS jumped up well after the call.

6

Google search on the COO brought up an interesting article to read
https://www.vox.com/2018/2/27/17056004/pinterest-francoise-b…

1 Like
7

As we review Q4 results, I think it is worth noting here that PINS is a cyclical business and routinely performs far better in Q4. The holiday season has a strong impact on Q4 performance.

If I was better at presenting charts on this message board, I would post '16-'19 ARPU by quarter and you would see a statistically significant trend in their Q4 “pop” in ARPU.

That being said, I have been long on PINS for quite some time with the underlying thesis being PINS ability in the future to monetize international users and continue to expand on its part e-commerce, social media and display advertising platform. It has been a slow slog on the international ARPU front… Personally, I would be happy with international ARPU at $1.00 or 5X.

I think one of my bigger concerns for domestic and international growth is PINS inability to target male customers. Many will argue that this is not that big of a deal since it can be argued that women make the vast majority of household purchases; but I believe that one of the biggest levers that PINS can pull for growth, especially additional domestic growth, is by targeting the male customer. I have read elsewhere that the percentage of new subscribers is between 40%-50% male which is a good sign and that internally, PINS would like to target a female/male demographic split of 70%/30% by 2022.

8 Likes
8

Bear,
International ARPU tends to be low. You may chk Facebook Int/US ARPU as theb limit. I would think it will be lower as DIY is lower outside the USA - if my understanding is correct PINS does well with DIY. Despite this there could be enough grth.

9

International ARPU tends to be low. You may chk Facebook Int/US ARPU as theb limit. I would think it will be lower as DIY is lower outside the USA - if my understanding is correct PINS does well with DIY. Despite this there could be enough grth.

TexMex makes a good point. I should not have suggested International ARPU could be 50% as high as US ARPU. Facebook’s looks to be about 20%.

Plug that in for PINS in 2019 and total revenue would have been $1.6 billion. Not nearly as good as the $2.5 billion I calculated, but a heck of a lot better than the $1.1 billion actual.

So their runway still impresses me. Their International ARPU for 2019 was 54 cents, and US was $12.07. International was a mere 4.5% of US. So even if they “only” get to 20%, that will be huge.

And remember to get revenue you multiply ARPU by users. And the number of international users is still growing at 30%+.

Mar18 160m
Jun18 156m
Sep18 171m
Dec18 184m
Mar19 206m
Jun19 215m
Sep19 235m
Dec19 247m

Impressive numbers, but as I said, only about 3% of the world’s population…plenty of room to grow!

Bear

5 Likes
10

I’m incredibly bullish on Pinterest right now because of the lower EV/S and the high revenue growth rate. Many of the stocks discussed on this forum have appreciated largely due to EV/S multiple expansion from a much lower base (i.e. AYX, OKTA, ROKU, etc.) and if Pinterest can continue to deliver strong earnings growth, they will probably replicate Snapchat’s recent growth and insane multiple expansion. Specifically, Snapchat went from a ~6x P/S multiple to a ~13x P/S in almost one year (Using P/S since I couldn’t find a quick and dirty EV/S comparable, generally they’re pretty close EV/S and P/S) and that resulted in 200% share appreciation in 2019. Snap’s multiple expansion isn’t unreasonable either, anything in the mid-teens for a 40-50% grower is about average.

Pinterest went as low as a 9x EV/S and is currently at an 11.3 or so. If that were to expand to anywhere near the EV/S that Snapchat peaked at before their most recent earnings call (I think they hit 16x), that would result in some significant share appreciation by the end of the year.

Using FB as a comparison for International ARPU (using their smallest geo segment as a floor comparable to Pinterest):
2010 Q4 Rest of World - $0.33
2011 Q4 Rest of World - $0.41 (24%)
2012 Q4 Rest of World - $0.56 (36%)
2013 Q4 Rest of World - $0.84 (50%)
2014 Q4 Rest of World - $0.94 (12%)
2015 Q4 Rest of World - $1.10 (17%)
2016 Q4 Rest of World - $1.41 (28%)
2017 Q4 Rest of World - $1.86 (32%
2018 Q4 Rest of World - $2.11 (13%)
2019 Q4 Rest of World - $2.48 (18%)

Since ARPU is a function of advertiser demand, ad load and user growth, as long as Pinterest can continue to scale their international MAU growth, more advertisers will flock to the platform which will increase bids in their ad auction and increase ARPU. Since Pinterest is very well suited for e-commerce retailers and as they innovate on their ad product offerings, I think ARPU will likely grow exponentially in the coming years.

In addition, as Facebook has continued to monetize its MAUs, their CPMs have skyrocketed and for many advertisers, the ROI is not as strong as it used to be. So, often when that happens, advertisers will then look for other channels to drive return on advertising spend and Pinterest would be a clear winner in this. Many advertisers will spend a large chunk of their marketing dollars on Google AdWords and pair that with Facebook/Instagram and once ROAS becomes inefficient or they want to expand reach, they pursue other channels such as Programmatic ($TTD) and other Paid Social networks (i.e. Pinterest, Snap, LinkedIn).

Finally, Pinterest’s adjusted EBITDA metrics seem to be heading in the right direction quarter after quarter and I think their 2020 guidance is likely conservative ($1.52 B in revenue and EBITDA Margin of 1%):


adjusted EBITDA				
	Q1	Q2	Q3	Q4	Total
2017	-51.27	-26.96	-26.86	12.09	-93.00
2018	-45.30	-31.90	-13.40	51.70	-38.90
2019	-38.40	-26.00	3.90	77.00	16.50


				
adjusted EBITDA margin				
	Q1	Q2	Q3	Q4	Total
2017	-62.52%	-26.69%	-23.16%	6.99%	
2018	-34.58%	-19.81%	-7.05%	18.87%	-5.15%
2019	-19.01%	-9.92%	1.40%	19.25%	1.44%
14 Likes
11

Pinterest’s Q4 ER caught my eye due to these posts and I started buying a position today after it pulled back close to pre ER prices. AH there was news released that FB is releasing a “Pinterest-like” app called Hobbi.

PINS took a hit AH I am going to take it as an opportunity to add some more tomorrow if it is down big. IMO Facebook making this app is a good sign that they believe there is a big enough market for it to be worth it. Plus Pinterest seems to have a decent head start on them so not sure how much of a success/threat it will be in the long run.

bnh
Long PINS

5 Likes