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CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.

COMPANY OVERVIEW

Pinterest (“PINS” or the “Company”) is an inspiration and discovery platform that is emerging as a scaled digital advertising alternative to the Facebook/Google duopoly with its 367MM monthly active users (“MAU”) as of 3/31/20 earnings press release (90MM US and 277MM international).  The platform has visual content and discovery tools that allow its users (“Pinners”) to create personalized collections of human curated media.  Pins are created when Pinners save images or video found or saved from around the web by other Pinners, curators, or businesses.  Pinners use Boards to effectively catalogue, save, and organize pins around topics of interest.  Boards can be further divided into sections (e.g. “fashion” board could have “shoes”, “tops”, and “glasses” within it).  Every saved pin must be categorized under a particular board, and the user can access and customize their boards from their profile.  These pins link back to the original site where they were found, and when people click on a Pin they can learn more about it and possibly act on it, with the ability to buy items through features such as Product Pins (which makes items shoppable with up-to-date information) or Shop the Look (enabling Pinners to shop for products seen in Fashion or Home Décor Pins).  

In my view, the Company is uniquely positioned between Facebook and Google.  PINS is a productivity tool for planning that emphasizes discovery over search and as a personal rather than social experience.  Unlike in informational searches, Pinners are often not looking for one correct answer, do not know what they want or how to express their queries in text, and are open minded to design, brand and product.  When Pinners embark on a “search”, they view an average of 50 pages which is equivalent to scrolling through 5 pages of Google search results per RBC report dated 5/12/19.  Unlike in social, users are fundamentally pursuing self-care/interests rather than making connections or interactions, making it the health and wellness platform with high brand safety (no politics; fake news; controversial content; 91% of pinners say PINS is filled with “positivity” per Talk Shoppe Survey cited in its April 2019 IPO prospectus).  Based on my conversations with others knowledgeable in this space, I believe the latter is an understated advantage and should not be dismissed.  PINS’ high brand safety environment is a real differentiator for advertisers who are increasingly focused on presenting their brands with suitable content and associating their brands with pleasant user experiences.  Historically, PINS has addressed not only top-of-funnel content but also the elusive mid-funnel, including longer term consideration purchase windows.  The Company is gradually moving down the funnel to close the loop and directly facilitate/enable transactions – one of the biggest gripes of users is the inability to easily buy products, which causes users to drop off and search for that product on another platform (per former employees).  PINS has lower user frequency than its social competitors but much longer engagement and higher commercial intent, a key distinction which makes it more akin to search based on company disclosures and third party surveys (e.g. Deutsche Bank report dated 5/13/19).  

PINTEREST DESERVES TO EXIST WITH UNIQUE USE CASES FOR “PINNERS” AND DIFFERENTIATED VALUE PROPOSITION FOR ADVERTISERS

My concern that PINS is a feature that can be copied by Facebook as it has done with Snap and Twitter have been allayed.  Based on my research, I believe the Company’s unique positioning as a hybrid social/search platform that inspires its users to visually discover and answer difficult subjective questions/desires that lack objective discrete answers  supports the fact that its business model is not easily copied.  PINS graphic content has been thoughtfully curated by humans at (in my view) nearly irreplicable scale and cannot be matched with machine learning or AI.  Because there is no inherent adoption virality, there are “industrial” moats that likely make quick unexpected disruption harder and enable PINS to keep ahead as its scale feeds into better user experience.  In my opinion, human curation and personalization in its taste graph make it hard to leapfrog/short circuit with technology alone, suggesting that any competitor (e.g., Google or Facebook) would need to build a comparable data set manually through its user base.  Consider the simple graphic below (from IPO prospectus in April 2019) which shows all the different keyword tags that humans associate with a simple picture.  While machine learning or AI would tag this as Machu Picchu, human Pinners tag this with many other subjective terms that are seemingly unrelated.  Powered by human curation, the Taste Graph seeks to serve up the most relevant picture based on context and tags, making this picture easily discoverable to a Pinner with similar desires.  As users pin, Pinterest is able to [1] improve its understanding of user preferences; [2] glean from that data how similar consumers may think; [3] enable the Company to make its platform feel more personalized (according to Talk Shoppe survey cited its in IPO prospectus, 82% of Pinners indicate Pinterest feels personalized to them).  For context, the taste graph has >175Bn pins saved and assigned to 4Bn saved boards per the Company’s IPO prospectus (April 2019).    

Source: IPO prospectus, 4/17/19

As previously discussed, PINS occupies the space between social and search.  Users on the platform have a different mindset than on Facebook and Google: they do not come to the platform to socialize with friends and typically are not searching for discrete products/SKUs that have objective answers.  They come to PINS with high commercial intent and are typically project driven (85% of users say they go to Pinterest to start a new project according to Talk Shoppe survey cited in its IPO prospectus) and seeking inspiration on design, style, brands, products, etc.  Questions they’re looking to answer are not as simple as “black dress shoes” but more complex with no straightforward answer such as “shoes for wedding” or “ideal living room.”  For example, PINS says the #1 search during the week of Valentine’s Day was “Valentine’s Day Gift for Him.”  While users come with commercial intent, they often do not come with specific brands or SKUs they’re looking to buy.  This provides advertisers with an equal opportunity to inspire and influence rather than being taxed for a preconceived purchase (i.e., advertiser would have won that customer in most cases irrespective of Google which was simply used to find them).  Therefore, I believe that PINS addresses both the top and middle of the funnel, where the latter has historically been difficult to reach digitally.  Moving down towards the bottom of the funnel is a priority for PINS as it looks to continue rolling out vertical specific features that enable shopping (not necessarily take rate model with payment on the platform; can be affiliate or links to advertiser webpage).  

POTENTIAL TO CHALLENGE THE DIGITAL DUOPOLY IS UNDERAPPRECIATED BUT FAR FROM CERTAIN

In addition to the differentiation on use case and intent, PINS also benefits from positive externalities which are hard to measure but important.  Many are rooting for PINS to succeed and are longing for an alternative to Facebook and Google:

1. Users: PINS delights its customers as shown by very high customer satisfaction scores, in-line with Instagram (per semi-annual RBS social media survey published in research report dated 10/20/19).  Based on data going back to before 2016, there were no negative effects on user engagement or experience as PINS expanded ad load on the platform.  In contrast, media reports suggest that people were negative about general advertising and had privacy concerns with social media.  Ads are more native to the PINS experience than Facebook, which means they should be able to support higher ad load and be less distracting or nuisance.  Because users find utility on the platform, I believe it may be less exposed to fad risk.

2. Advertisers: Based on my research, it appears that advertisers are looking for Facebook/Google alternatives and looking to lessen dependence to the extent possible.  The issue in the past was there did not exist an effective advertising platform with scale.  Enter PINS.  While PINS cannot address reach/frequency of FB/Google, I believe it should be able to meet and potentially exceed advertising effectiveness, especially in the mid funnel where there are no great solutions.  I’ll add that advertisers tend to view PINS as the health and well-being platform – this should not be underestimated.  Brand safety is increasingly becoming important for advertisers and they want to ensure their brands/products are displayed next to suitable and relevant content and associated with positive emotional state.  

3. Regulatory: Google/Facebook face privacy backlash and is subject to continued anti-trust rhetoric and/or policy from lawmakers.  PINS would be subject to the same constraints around GDPR-like policies but I believe it can be a net beneficiary from the controversy surrounding the industry giants.  At the very least, PINS should be less impacted by regulatory concerns around having too much market power and not be subject to punitive anti-trust policies.  PINS is an early dominant social media player with a legit mousetrap without the regulatory issues – one of the major concerns that are capping valuations of Google/Facebook or maybe even limiting their ability to reach true potential of their technology/platform due to self-policing.

Aside from the positive externalities, I believe one of the fundamental differences of PINS vs. social is that advertising could be a positive for the platform and user experience if done in a tasteful, relevant, and high quality manner.  At the core, users are going on PINS to explore interests, to discover, and to be inspired for an end goal which may be difficult to define.  I believe the ad load is one of the most underappreciated aspects of the story.  While I will not go as far as saying that 100% of its content can be an ad (theoretically – yes, practically – no), I have high conviction that PINS can support much higher ad loads as long as the relevancy and inventory matches user needs/searches.  Sky is the limit but it is not an easy task and requires more advertisers to commit to the platform (vs. experimenting), dedicated creative resources whether at advertiser or 3rd parties, and content from long tail supply.  The extent of the success of each factor will depend on the platform – ad tech and user count/engagement.  As long as the eyeballs are there and the tech stack is there to enable advertisers to take advantage of the traffic and intent, I believe the platform should be able to continue making progress and snowballing on its practical limitations.

SUCCESS COMES DOWN TO MANAGEMENT AND EXECUTION

I view the biggest hurdle that PINS needs to overcome is measurement and attribution, which it is currently aggressively investing in.  In addition to typical brand and performance marketing, PINS seeks to add real differentiated value to the advertiser by serving high intent users, addressing longer term considerations, and filling the mid funnel.  However, the Company has real challenges with getting the proper credit.  In fact, this is an industry wide issue and it’s debatable whether it can be solved.  Facebook and Google have the resources to either pursue the opportunity themselves or continue improving the return on investment on their platforms in order to keep a newer platform such as PINS from emerging as a main competitor and relegate it to niche use case with remnant/experimental ad $.  For PINS to break through, it will need to have both internal and 3rd party validation of its influence in a transaction or on brand recall so that it can claim a piece of the pie from Google and/or Facebook.  Ideally, a hard ROI can be somehow measured with high confidence.  Currently, many of the PINS’ core advertisers are large companies who arguably are a lot more advanced in dissecting their advertising returns and allocating credit.  For example, Wayfair has the discipline, resources, systems, and sophistication to roughly measure with some confidence its return from PINS.  However, I will say this is more the exception rather than the norm and it becomes much harder as PINS moves to smaller customers who lack basic operating resources and time and find it much more worthwhile to spend on Facebook/Google given familiarity, adequate and measurable ROI, and self-serve tools.

Tech success ultimately boils down to management vision and execution, more so than other industries.  Unfortunately, I do not have a strong view and this remains a question mark.  The track record can be argued both ways.  The bears say the Company started before Snap so why hasn’t it grown bigger or just as fast?  Why is its ad tech so much worse?  The bulls will point to the fact that Ben Silbermann and team have built an impressive platform addressing both user and advertiser deficiencies with Facebook/Google and managed to scale this to 367MM users.  To be able to come up with inspirational discovery that combines social with search to address the sales funnel is no small feat especially when considering the Company’s competitive set.  

I have little doubt on his vision but I think the jury is still out on ability to execute, especially as it relates to monetization.  In his defense, I’ll say that the ad tech deficiencies relative to Facebook/Google are typical for a company at this stage (see Snap) but, more importantly, an output of his priorities.  It is clear to me that he has not focused on building some basic low hanging fruit given limited resources relative to the opportunity set.  For example, PINS has decided to build the ad tech internally where others such as Google arguably sped up development through acquisitions.  I am worried about whether the Company is stretched too thin to tackle some of these issues before advertisers “give up” on the platform as a viable alternative, or Facebook/Google catch up through innovation.  I think PINS has the talent on paper (with former Googlers and Facebookers on staff) to succeed and the Company pays well to attract/retain strong developers.

The silver lining from its ad tech deficiencies is that these appear to be fixable issues and are typical growing pains.  For example, the platform has gone from taking 7 days to get an advertiser up and running on self-serve to 2 days vs. goal of “hours” over time per a Deutsche Bank report dated 5/13/19.  PINS already solved the harder part of the equation which is attracting and satisfying a large base of active users.  There is existing ad tech out there that can be leveraged for PINS’ platform specific nuances but I think it is just a matter of time and resources.  Right or wrong, I take the view that a technology company can solve monetization and ad tech (even if it is a new paradigm) as long as there is a strong value proposition and engagement from users and advertisers and the Company has access to talent.  Recently, PINS has been more aggressive with its product rollout, though it is too early to tell whether they’re financially successful.  For example, the Company launched Pinterest Shop prior to the 2019 holiday season aimed at driving sales to small medium enterprises by offering consumers the ability to browse/shop Product Pins from 17 small businesses across the US in an effort to create unique products and enhance the discovery feel of its platform.         

MONETIZATION IS THE PRIMARY DRIVER OF EARNINGS AND BENEFITS FROM MANY UNDER-TAPPED LEVERS

Before bottom-up analysis of PINS specific drivers, I think it is helpful to level set the macro top-down picture of advertising today and future forecast over medium term.  eMarketer data cited in Deutsche Bank report dated 5/13/19 estimates that global digital advertising accounted for 46% of total ad spend in 2018 and is expected to grow low teens % over the next five years (vs. mid single digit % total advertising spend) to become >60% of global ad spend.  Within digital advertising, PINS had 0.76% of US digital ad spend and 0.03% of International ad spend in 2019.  Even if we restricted the US total addressable market to only retail and consumer packaged goods (core categories today; collectively accounts for nearly 1/3 of total US digital ad spend), 100% of PINS US revenue would be <4% of the US digital ad spend.  In this calculation, there is unaccounted upside from digital penetration of total ads in these categories and the expansion into other categories such as auto, financial services, and travel (key categories that have been called out by PINS where it is focused/experienced initial level of success).  From a high level, PINS appears to be barely scratching the surface of its potential.  There is a long runway for growth from [1] total advertising pie growing mid-single digit % over time; [2] digital increasing penetration and taking share within total advertising (low double digit % growth); [3] PINS gaining share within existing core categories and addressing new verticals over time; [4] international is in the first inning even when only accounting for its current markets 

So now that we’ve established there is a big potential pool of advertising $ that it can pursue, the question is how does it actually do this?  Let’s take a look at all the levers that can be pulled today (at least visible to a generalist like me).  Some of these may appear to be basic but I think it is important to keep in mind that the Company didn’t start advertising until 5 years ago.

1. Mix: Not a big issue because should be $ accretive but important to keep in mind.  Overall, mix is likely a negative impact given shift towards faster growing international markets where Revenue per MAU is lower.  However, life-for-like monetization by market should be increasing as PINS releases more products/features, ad slots, etc

2. Engagement: Can be defined as total posts viewed per MAU, which is a function of time spent per MAU and posts viewed per minute per MAU.  Success comes down to viability of the platform and continued innovation – new categories, more daily usage type content (e.g., recipes), better personalization, targeted re-engagement campaigns, better recommendations to new categories or content to start interests.  These are priorities of the Company’s tech investments

3. Ad Load: This is the dial-mover for the investment over the long term.  Theoretically infinite ad load where 100% of PINS can be advertisements if there is relevance.  Ads are more native to PINS environment.  This is the fundamental difference vs. social – the commercial intent of users.  Social tends to have lower ad load limits, and social users are more likely to complain that advertisements impinge on the social network experience.  This conclusion is supported by an independent UBS survey (report dated 5/13/19) where only 29% of PINS users indicated ads on the platform have become a distraction vs. 55% of Facebook users and 41% of Twitter users.  

4. LFL Pricing: This puts aside mix driven differences such as geographical and ad format.  The PINS platform is intentionally under-monetized today given its focus on user experience and platform features with finite resources.  To be clear, the platform is under-monetized on current feature set (good ROI vs. alternatives).  I believe the Company has a longer runway in this space when considering continued innovation as proven by the ROI improvements on Google/Facebook which subsequently get reinvested into the auction.  Over the short term, pricing is function of balance between ad loads (supply) and advertisers (demand), both which are increasing though at uncertain and possibly different rates.

5. New Products: Likely a longer term priority, rather than immediate need given the low hanging fruit concerning the above.  For example, the Company has discussed the value unlock for offline retailers such as Nordstrom from platform promotions or data to inform merchandising/display decisions.  Commerce may also a big future opportunity beyond affiliate/lead generation if it is able to directly close the loop as it proves attribution and can share more of the economics (e.g., rev share/take-rate)

UNFORTUNATELY, PINS IS EXPENSIVE ON NEAR TERM EARNINGS POWER…BUT HAS INTRIGUING UPSIDE OPTIONALITY OVER LONG TERM

Pinterest is not cheap especially when considering uncertainty around execution in a highly dynamic industry dominated by three of the most feared companies – Facebook, Google, and Amazon (emerging digital advertising platform).  Today, the Company was trading at ~9x TEV/FY20 Revenue while devaluing to ~5x in FY22.  However, at the current share price (~$21), I believe PINS has attractive convexity.  I believe that MAUs can continue a moderate pace of growth (mid-single digit % in US and mid-teens internationally to reach ~110MM and ~530MM, respectively by FY24) with the bigger driver of value stemming from Revenue per MAU increasing to ~$30 in the US and ~$7.50 internationally by FY24, which I believe should be above both Twitter and Snap monetization today (though I’ll add that each is increasing monetization over time).  Despite the “aggressive” assumptions, PINS still falls well short of Facebook’s ~$140 US and ~$45 Revenue per MAU in US and Europe, respectively, in 2019.  PINS international is also much lower than Facebook APAC’s ~$13 and ROW’s ~$9 in 2019 (Facebook data is sourced from its 2019 quarterly and annual earnings presentations), despite arguably higher income/developed market skew.  My assumptions result in revenue growth of mid-40% CAGR over the forecast period.  I also assume that Pinterest can achieve nearly 40% Non-GAAP EBIT margin in FY24, which is north of Yelp’s 30-35% medium term margin target but in-line with Twitter and Facebook’s current margin of 35-40%, respectively. 

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm.  The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herein.

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

The author or his or her respective employer or employer’s clients, affiliates, officers, managers and directors, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaims any liability for investment losses that you may incur under any circumstances.

The author does not hold a position with the issuer of the Security such as employment, directorship, or consultancy.

Catalyst

Better ad tech stack and measurement/accountability

Increased shoppable ad inventory