Pinterest

Updated: Apr 26

I am making this light research post free, it is not a Fiducia Pick given how many people I know own it so in my eyes it is not very original, and I have no "superior" insights nor do I feel like I have an informational edge, but I like the business and think it is worthy of ownership so I figured I would write about what I have read so far.

I have initiated a position in Pinterest for the long-term, but in my active account, 150 shares at $68.10, proof of the buy below:

For those who do not know, I run two portfolios. My Roth IRA (Fiducia Fund) and my taxable portfolio that consists of roughly 80% stock (that I will trade around) and 20% cash and options trades. I have broken down my thought process on this in two ways. One, I enjoy trading and do it for a living, I think it is OKAY to trade with a balanced approach and disciplined process. Second, I love investing in high quality businesses for the long-term, because to me that is how wealth is built and Pinterest pretty much fits my investment process and the business is so simple to understand. Obviously I wish I had done research on the name a long time ago, but there is no need to dwell on what we could have been, only on what is ahead for the business and ourselves. For that reason, I invested.

The Business:

I am sure you know someone who sits on Pinterest for ideas hours at a time. I know I do, and it went in one ear right out the other on investment opportunity even in the early stages before they were public. Story time...My fiancé works for Stitch Fix on the side, and I saw how busy and explosive that was becoming and we bought shares around $22 and sold around $33, too early. Sometimes ideas come to you in the most simplistic ways. According to Pinterest's most recent 10-K, their mission is to bring everyone the inspiration to create a life they love. What does this mean? The app gives inspiration, one personal example is my Fiancé finding a new dinner recipe on the app for us to eat, or showed my aunt what our wedding cake was going to look like. The post gave us inspiration to create a new homemade dinner experience and sparked an idea for a wedding cake design. Pinterest's business is revolving around the opportunity to discover a broad range of ideas anywhere from cooking, clothing, remodeling a house, workouts, or even hobbies like fishing, fashion, planning dream vacations, cars, personal finance, I could go on forever. The opportunity is endless from what I have gathered. Pinterest is uniquely favored by women, which account for a whopping 2/3rds of the 459m monthly active users.


"For example, in the United States, historically a substantial majority of our Pinners have been women of ages 18-64. We may not be able to further increase the number of Pinners in this demographic and would need to increase the number of Pinners in other demographics, such as men and international users, in order to maintain our user growth rate" (Source: 2020 10-k)


(this could pose a future risk to revenue & growth, noted)


We all know and understand the "what" of the business, what I really want to dissect is the "how" of the business, as in how is revenue derived.

Revenue:

2/3 of Pinterest's revenue in 2020, ending December 31, was derived from brand and performance ads. Brand revenue is billed when the advertiser optimizes the ad campaign around "brand" objectives (impressions or video views). The performance revenue is billed when the advertiser optimizes the ad campaign around "performance", like clicks and conversion events. Pinterest recognizes revenue only after transferring control of the promised goods/services to the customer, so in this sense revenue is recognized when the user clicks on an ad contracted on a "cost per click", "cost per thousand impressions", and "cost per view". This is all pretty simple to understand, right?

How was revenue driven in the most recent Fiscal Year? Revenue was driven primarily by the 12% increase in ARPU (Average Revenue Per User), this led to a $549.9m increase in revenue from the prior year +48% YoY from $1,142,761 to $1,692,658, 2019 to 2020. The business realized a 27% increase in number of advertisements served and a 17% increase in the price of advertisements. International revenue seems to be a very bright spot, increasing 129% YoY to $268.2 (of the total revenue), one can only assume that this will be a strong focus for analysts expectations further down the road. Listed below straight out of the 10-K.


Obviously I have not been following the name extensively, so I am shooting into the air here. Down below you can see they tend to beat:


Revenue:

Earnings:


Pinterest uses a few key metrics that everyone should be aware of, if you are not here you go:

  • MAU - Monthly Active User

  • ARPU - Average Revenue Per User

Obviously we want to see these both increase over time.


Last Earnings Call Notes:

  • Profitable on a non-GAAP basis in 2020

  • Expanding focus to bring "creators" or inspirational people onto Pinterest -> Drive revenue (learn directly from great chefs, home decor tips, fashion)

  • Improving relevance of recommendations for deepening the Pinner experience (more time spent, more ad revenue, better growth :) )

  • Focused on a positive environment rather than a negative environment (shots at FB?)

  • With an economic boom coming, Pinterest states it is helping more businesses get their products on Pinterest and help Pinners discover them

  • Expanding feature globally, (again, seems international expansion is heavily noted)


Todd Morgenfeld:

  • Revenue grew 76% YoY

  • Adjusted EBITDA margins of 42%

  • MAU strong growth in the double digits across all major regions

  • Expanded sales team in Western Europe to monetize engagement

  • International Business grew 145% YoY, strong ad demand. Int Markets account for 17% of total revenue

  • Q1 to grow revenue in low 70%s. (my guess is mid 70s especially with international women's day)

  • Expect positive trends from investments in ad tools: shopping and automation and sale coverage expansion

  • Focus on Latin America inn 1H of the year

"Another example is the luxury coffee company, Nespresso. They partnered with our teams to uncover key consumer trends around the holiday season, including search trends and consumer intent around holiday gifting, coffee recipes and seasonal flavors. With a better understanding of both auction dynamics and Pinner behavior, Nespresso delivered effective advertising campaigns that also showed positive results in a third-party brand study." -Todd Morgenfeld


This gives me deeper insights into the way they interact with other businesses working together for a common goal. It is a win/win for both Pinterest and Nespresso.


Thoughts & Commentary


The bottom line for me is this international growth expansion, those are some wicked numbers and I will monitor those over the next few quarters. They are introducing more ways to shop and ease the checkout process on the app, efficiency is improving within the business and business deals. After reading management commentary, I have this odd feeling Pinterests is a more happy Facebook platform, feels weird to say that. We are increasingly seeing communities and creativity being built, it seems like a strong way to create an ecosystem (Roblox..). I think monetization efforts here will largely reflect how well management can adapt, especially with potential incoming regulation on ad targeting (this will now be a new area of study for me). To me this news could be largely priced into the current share price, but who really knows. Pinterest seems very unique to me, I downloaded the app and messed around in it. Digital advertising is a competitive area, so it is best to continue to grow the user base for a further reach and create strong business relationships. Personally I probably wont find myself on it much given I spend about 10-12 hours a day reading and researching global markets, but to those who use it keep it up!


Regulatory Risks? Management knows!

"Second, changes to privacy in the measurement landscape. This could impact the industry's ability to attribute conversions or serve relevant content."


I feel that the business is so simple it is so easy to invest in. Below are some charts from Koyfin on Sales, EBITDA, EPS GAAP, and EPS:

At a glance it really does not seem too expensive (relative to what a lot of investors have seen in this current market environment). From my experience, you pay for quality.

In the above photo, the FY22 and FY23 look pretty conservative and in my opinion may not be factoring in rapid triple digit international growth.

I really do not see how this is not a $100b+ company in 5 years. I know that is a little wishy washy and arbitrary to say, but international growth continuing at 100%+ feels like just the beginning. Is this business just hiding in plain sight? I really wish I came across this earlier, but as investors we have to remain dynamic and I truly think this is an opportunity.


I will not cover this name in-depth like I do my other core holdings, as of this writing I am long the stock and I feel my thoughts here may be helpful in some way. I just wanted to jot some things down that were running through my head.


Chart:

Here is where my trading brain kicks in, held strong around their 150dma, you can see in the VolumeProfile that shares have been accumulated around $71, the most down around $34.


I can see around $110-125 by December easily (given the market remains in the upward direction, obviously technicals can change on a dime). Looking forward to the next report on May 5th 2021, per Koyfin.


Fiducia


(I am not a pro on this business, but I like it)


Questions I have for whoever reads this and knows the business better:

  1. Lockdowns internationally drove revenue pretty strong, will this continue in the triple digits?

  2. Is there potential M&A for Pinterest to grow even more? (whether it be tech platform, software, etc)

  3. What are the largest risks other than regulatory?


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