46042228-46d0-40bd-961c-f35d9bb304d6_Pinterest-premium-report.pdf
Pinterest Premium Analysis
Pinterest – Timing Looks Better Now
I’ve been cautious about Pinterest in the past as social media often has a hard time holding its value in the months that follow the IPO. Pinterest’s lock-up period is behind us with the expiration having occurred on October 15th – same day as Zoom.
My best guess is that the IPO lock-up is already reflected in the price going into these earnings, and Pinterest has a high probability of doing well in the next quarter. Pinterest has proven itself as a solid social app in its first few quarters on the public market – something that few of its predecessors have done.
Pinterest is strongest in the fourth quarter. Unlike Snap which lowered guidance going into Q4, this should be Pinterest’s best quarter. In fact, Pinterest is second to Facebook for generating holiday revenue (although Facebook in the lead by a wide margin). In the event Pinterest remains steady this earnings season, I’m interested to see if the issues with Twitter and the lowered guidance from Snap will help investors view Pinterest as a good option, comparatively.
Q4 tends to outperform historically ….
Overall, Pinterest has a stellar business model that functions like a hybrid between e-commerce, social media and display advertising. Pinterest refers to this as a discovery engine. Similar to Shopify, Pinterest challenges the dotcom era e-commerce companies that still dominate retail, such as eBay and Amazon, an area overdue for disruption.
In the past, I have been critical of Pinterest’s international ARPU. In the S-1 filing, the company was somewhat evasive about it when quoting the overall key metrics. I was vocal about this around the IPO as it’s the lowest ARPU I’ve ever seen from a social site. Note: overall ARPU for Pinterest is healthy due to the United States averaging out international. I expand on this point below.
Ben Silberman is a classic founder-CEO who flies under the radar. I’ve seen him speak quite a few times and he has an excellent reputation in Silicon Valley as someone who is ahead of the trend curve and is patient in his outlook. He is not hasty and you won’t see him in the limelight much, although he has the ideal, impassioned Founder-CEO recipe.
Fundamentals & ARPU
In Q2 2019, Pinterest reported 62% revenue growth year-over-year of $261 million. Analysts were expecting $233.7 million in revenue. Adjusted EPS was -$0.06 versus expected -$0.08. The company raised revenue guidance slightly from $1.06 billion at the midpoint to $1.105 billion. This was a solid earnings report. Monthly active users also exceeded expectations at 300 million versus 291 million.
Average Revenue Per User
In the past, I have been a critic of Pinterest’s international ARPU. To be clear, I still see this as an important risk to continually monitor as a disproportional amount of growth is coming from international (80% growth) yet the ARPU is so low, that it could damage operating margins long-term and lead to losses.
The United States users monetize at $9 average revenue per user annually while the international user monetize at a mere 25 cents per user, as of 2018. This is what that looks like:
Pinterest’s international revenue is growing at 199% last quarter, but this is because the numbers are so small. To compare, Facebook’s international ARPU is at $7 and has never been below $1.50 as a public company even with the stock struggled in 2012. Twitter has seen below $1 ARPU but was also hovering at 5 price-to-sales during some of this time period compared to Pinterest’s 16 P/S. Meanwhile, SNAP has nearly 1500% more ARPU in the rest of world region at $1.24.
Pinterest is Niche, yet Fires on Many Cylinders
The United States is where nearly all of Pinterest’s revenue originates. Pinterest’s top five countries are the United States, Brazil, India, Turkey and Russia. Many investors are discouraged by the skew in demographics towards women, as they view this as limiting the addressable market. However, 80 percent of household purchases are decided by women.
In addition, Pinterest is adding many male subscribers; depending on the source the percentage of new subscribers that are male falls between 40-50%. This will put the gender split between women and men at 70/30 by 2022.
Relative to market cap, Pinterest is ranked among heavyweights when you consider its digital reach. It nips at the heels of eBay and Twitter and could easily rival Wal-mart in a couple of years (on digital reach). This is important because 87% of Pinterest users have purchased a product due to exposure on Pinterest and nearly half of Pinterest users have a household income over $100,000.
For retailers, Pinterest rivals Instagram despite having a fraction of the user base. One out of every 2 Millennials use Pinterest with Pinterest driving the same percentage of product discovery among Millennials as Instagram despite having one-fourth the user base.
Source: Kleiner Perkins
Valuation
Pinterest I wrote at length about Pinterest’s valuation on my free blog when the company went public. There aren’t many examples of successful investments in social media trading at above 10 price-to-sales. Historically, Facebook traded at a price-to-sales of 15 between 2013 and 2016, however the company had 1.2 billion users at that time and 63% YoY growth and $1.5 billion to $3 billion in profits.
Pinterest is a better comparable to Twitter and Snap’s user base in the 300 million range. Twitter did have a P/S above 15 when posting 75% growth but did not last long as the price was down nearly 50% within two quarters. Notably, Pinterest is a discovery engine and I believe the ARPU has the ability to surpass Twitter and to steadily climb rather than be driven by only traditional ads. Snap has also seen sudden corrections above the 10 P/S mark even when reporting 50% YoY quarterly growth.
With that said, as noted above, advertisers and retailers see Pinterest as a more valuable platforms as users are in a shopper mindset.
In the conclusion below the technical analysis, I point out the probability is higher that Pinterest remains strong this quarter and next quarter fundamentally when compared to peers Twitter and Snap. The technicals are setting up nicely and don’t raise any flag, with the information we have today.
For a larger buy-and-hold investment, I’d like to get Pinterest below 10 P/S but I am playing momentum in the short-term.
Technical Analysis
By Knox Ridley
Symmetrical Correction
Pinterest, from a technical perspective, is suggesting a nice set-up.
First of all, the structure of PINS is a clear 3,3,5 correction. In other words, if you follow the blue A, B, C, they each have an internal structure, which is highlighted with the orange circled letters. So, the A-wave is a 3-wave move, the B-wave is a 3-wave move, and the C-wave unfolded in a 5-wave drop. This 3,3,5 structure is very common with corrections.
Most notably, the length of the A-wave drawdown is the exact length of the C-wave drawdown. In other words, we have a symmetrical A=C correction, which is also very common. This is referred to as the 100% extension of Wave A (So, A=C), which is shown as the blue support on the right. Another visual of this is below.
The length of the first drawdown was about 33.5%. The length of the second drawdown was a little over 34%. Price tends to correct in symmetry, which can offer a guidepost for bottoms as well as help guide risk/reward setups.
RSI Divergence
If you look at the RSI pattern in relation to the price action above, we have a clear positive divergence between the RSI and the price. As the price is making lower lows, the RSI is making higher highs, suggesting fading downside momentum. This suggests a possible trend reversal.
Furthermore, the price is trading just below the 10-day exponential moving average (EMA), and the 20-day EMA. These moving averages give more weight to recent price action, and are indications of short term and mediumterm trends. They should act as resistance, but I’m expecting PINS to take them back, which will add further evidence of an upward trend reversal in progress.
Conclusion
The market has been challenging lately, but we like this set-up. The fundamentals and technicals seem to agree that Pinterest has a higher probability of receiving a positive reaction to earnings. You can place a stop just under the 100% extension at $24.50. If you want to give it more breathing room, place your stop below the 123.6% extension at $22.00.