Pinterest, Inc. (PINS): Bull / Bear Investor Discussion

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Q4 2022 Digital Advertising Update - 01/18/23

Publicly traded companies mentioned herein: Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), Pinterest Inc. (PINS), Shopify Inc. (SHOP), Snap Inc. (SNAP)

Introduction and Background 

The majority of the investor participants are long shares of Pinterest (NASDAQ: PINS), but one has and continues to be short and another investor is bullish in the short-term but bearish longer term. Pinterest is a market-leading platform with a unique position at the intersection of social media, search, and commerce ecosystems. PINS is known for the creativity and the imagery of its content; and its consistent and growing user engagement, especially by Millennials and Gen-Z on PINS mobile app. Pinterest completed a CEO transition in June, 2022 with founder, Ben Silbermann, moving to the Executive Chairman role. New CEO Bill Ready, who was most recently at Alphabet, and responsible for Google commerce, recently articulated the Company’s four strategic priorities for 2023: 1) growing monetization and engagement per user; 2) integrating shopping into the core of the product experience; 3) improving operational rigor, and therefore, margin expansion; and 4) strengthening PINS leadership as a positive and brand-safe platform. This change in leadership was followed by a disclosure that activist investor Elliott Management had become PINS largest shareholder owning 9% of the shares and was seeking to implement change at the company. Longs outlined the opportunity as almost two distinct bull cases. One case where an investor can make 40-50% over the next 18-months and the other where you make multiples of your money if PINS can figure out “inspiration of purchase.”

Full-Funnel Vision 

The bullish investors believe the real opportunity for PINS is consistent with management’s long-term vision to enable full-funnel commerce on the platform-by leveraging the platform’s unique elements with respect to high shopping intent and utilities of both discovery & conversion. Pinterest’s full-funnel advertising solution maps to the consumer buying journey on the app, from building awareness and comprehension at the top of the funnel, to supporting engagement with brands in the middle of the funnel, to driving purchases at the bottom of the funnel. The investors believe the new management team has the right background and opportunity to create a platform for full-funnel buying that links components of social and search to the PINS platform and its users. One of the investors opined that Bill Reddy has prioritized advertising as the product and not a by-product of the company that was there just to sustain the business as the founder Ben Silbermann did. With its high shopping-intent user base (as opposed to passive or "lean-back" media consumption characterized by META and TikTok to name a few) and full-funnel utilities across both discovery and conversion, the group viewed Pinterest as a more unique/targeted offering for advertisers. They noted other social/digital media platforms have adopted shopping & social commerce capabilities with varying degrees of success over the past few years-so they recognize the risks Pinterest faces. But, if PINS gets further into shopping there is a bull case that PINS becomes the “catalog” of the internet that will help drive its high CPM shoppable ads. Importantly with expanding margins as a goal, management has changed the direction of its investment plan to capitalize on the shopping/commerce opportunity, which the group viewed favorably for both execution and cost effectiveness.

ARPU, MAUs and Other Long-Term Opportunities

The long biased investors agree with the management team that there is a real opportunity to increase MAU’s (Monthly Active Users) and engagement through improvements to the platform. They believe that the addition of video, use of the Trends tool, and Pinterest Predicts data analysis can help boost MAU’s. Users have been a headwind over the past two years but more than one investor believes that it has been more of a headwind to investor sentiment and the stock’s multiple. However, he bases his core thesis on ARPU growth. Nevertheless, engagement on the platform is inflecting positively and mobile users are ramping which is where PINS generates the majority of its revenue. The investor group believes there’s a long runway for expansion of domestic and international ARPU, as the company serves a growing list of targeted brands and executes a better focused domestic playbook. New emphasis on commercialization of the platform and continued development of its advertising segment will be key to revenue growth in 2023. PINS management team is focused on transitioning from an experimental site for an ad buy to a “must have” for certain brands seeking an engaged user-especially in the Gen-Z and Millennials demographic. 

There are two main areas that one long investor is focused on. First off, from an ARPU perspective Pinterest is under-monetized compared to other more developed platforms like META. Secondly, in terms of e-commerce focused platforms they trail the likes of Amazon and others immensely. He doesn’t assume that PINS even remotely achieves the scale of either META or AMZN but it does speak to the long runway for ARPU as PINS improves its ad tech and management continues to execute.

When looking at U.S. ARPU, one investor expects improvements in PINS ad tech including attribution and measurement which should drive some growth in U.S. In addition to the expansion of U.S. ARPU there is a very large opportunity for PINS to grow its international ARPU. Similar platforms to PINS have international ARPU as a percentage of U.S. ARPU up to 20%, while PINS international ARPU is still single digits. Another long investor compared PINS to TWTR noting that while TWTR has not been a successful advertising platform its international monetization is well in excess of PINS. He provided some framework where TWTR’s international MAU’s monetize around $5/MAU compared to PINS European MAU’s that are currently in the low $3 range and PINS Rest of World MAU’s monetizing around $0.50. Given the intent advertisers gather from PINS platform he argues that PINS International MAU’s should get to at least $5 and that alone would double PINS current revenue base. A long-term bull case could be made that if 10-20% of PINS ads become as monetizable as Google PLAs (5-10X that of PINS), investors could make multiples of their money.

Management also believes there is a real margin expansion opportunity in 2023 because many foundational investments are at a point where they should be seeing a ROI, including the product catalog. With key hires in engineering, targeted marketing spend should see a short-term return, creating a full funnel shopping platform. Other opportunities include increasing shoppable inventory on the platform-through direct integration with merchants and through third party partnerships (e.g., Shopify). Post pandemic trends and engagement are favorable with a growing 450mm MAU’s at year end, with mobile app MAU’s up 14% YOY globally. The investor group noted that the Board has approved a 12 month $500mm stock-buyback program. 

Risks

A historically very bullish investor is still bullish short-term based on the narrative that PINS inventory could be made available on DV360 and his checks point to inventory potentially being available on DSPs this year. This narrative could drive a 2H recovery for PINS revenue and margin but he remains cautious long term for structural reasons.

His near term caution is focused on overall ad spend. This year could be the year that Brand ad spend gets pulled and gets put into Direct Response (DR). Core verticals like CPG, Retail and Furniture, which are the core of PINS advertiser base, are being pressured.

Longer term he thinks PINS could have a user issue which is evident by the company giving out new definitions about the user. He doesn’t think the company has the ability to spend marketing dollars to grow its user base as these users will churn and prove that there is a saturation issue in the U.S.

The CFO, Todd Morgonfeld, announced two weeks ago that he is leaving. Given the long thesis investors have laid out he finds it shocking that the CFO would leave right now.

The investor group noted that macro headwinds in global advertising spend and for the consumer in the event of further economic slowdowns could certainly stall management's ambitious plans for a significant commercial turnaround for the company. They also noted there is real execution risk for Bill Reddy to smoothly accomplish such a significant pivot in the company’s culture and goals for the platform. Even if he can accomplish the pivot there is an uncertainty on how long it will take. Further execution risks include PINS ability to prove that they can yield more ARPU from their MAU’s, expense cuts, and a potential reorganization of the sales team. 

Valuation 

With regard to valuation, one of the bullish investors uses an EBITDA multiple of roughly 20-25X for 2024 and 2025 that gets him to a $50-$60 stock and +30% IRRs. He doesn’t think this is crazy for a company with no debt, 15% of the market cap in cash, growing revenue at a double digit pace and EBITDA at a higher rate. He also reiterated that if PINS is successful on a number of its opportunities the stock could go much higher. The bearish investor views the higher end multiple assumptions as simply too high given his expectation for a slower rate of change than bullish investors appear to be underwriting.