5./15 WEST
Shares of Pinterest (NYSE:PINS) have fallen to the $20 mark on the back of poor quarterly results reported by its peer Snap (SNAP) this past week. Late last year I concluded that I was appealed to the fundamentals of the platform, which let me hold a position in the shares, far too early of course given where we trade right now.
At the time, shares were already in free fall after difficult comparables, with engagement down, as I was a bit too early with my bottom fishing attempts.
Some Perspective
In the second half of last year, shares of Pinterest fell into free fall as the company guided for a lower active (US) user base. The reopening of the economy and harsh comparables triggered a huge pullback in the shares, yet I remained upbeat on the fundamentals of the platform.
I believed, and still believe, that the company is less annoying than other social media business models, with much of the content based on a “pull” method instead of a “push” model. This results in higher engagement and control over content, with payments being tied to ideas instead of people.
This results in less potential scrutiny from regulators, legislative agencies and consumer groups. With the company solidly profitable, and overseas ARPU lagging in a much larger way than many peers, I felt good about the longevity of the business model and overseas growth monetization opportunities.
After an initial scare reaction during the pandemic, sales growth accelerated in a big way in the second half of 2020, with revenues trending at an annual run rate of $2.8 billion and earnings seen at $800 million (GAAP), albeit that both numbers were heavily overstated because the fourth quarter is seasonally a much stronger quarter.
The company has seen incredibly strong momentum in the first half of 2021 with first quarter sales up 78%, second quarter sales up an astonishing 125%, yet the company warned for just 40% growth in the third quarter, a number which came in around 43%. All of this growth was driven by monetization with engagement numbers being flat. US ARPU rose 44% to $5.55 in the third quarter of 2021, as international ARPU came in at a dismal $0.38, albeit that it grew 81% on the year before.
With growth seen in the high-teens for the fourth quarter of 2021, full year sales were seen around $2.5 billion, translating into a 10 times sales multiple if one factored in net cash of $2.3 billion at $42 at the time. With full year earnings seen around $400 million, a 60-70 times multiple remain high, yet I thought there might be potential. Remember that we were still in the market mantra of 2021.
Suffering A Harsh Fate
Since becoming too upbeat (and too early) at $40 in November of last year, shares fell to the mid-twenties by March and ever since have traded in a $15-$25 trading range, now exchanging hands just above the midpoint of the range. In February of this year, the company posted a 52% increase in 2021 sales to $2.58 billion as growth came in at 20% in the final quarter of the year. Quarterly GAAP net earnings fell shy of expectations, with full year earnings reported at $316 million.
The company guided for first quarter sales growth in the high-teens and non-GAAP expenses to grow by around 10%. At the same time, the company issued a big expense warning, seeing a 40% increase in non-GAAP expenses for the year, needed to drive the ecosystem forward, yet thereby indicating severe margin pressure.
In April, Pinterest posted an 18% increase in sales to $575 million, yet the global monthly active user base was down 9% to 433 million. The company posted a GAAP loss of $5 million, but this is typically a softer quarter. The company guided for 11% growth in sales in the second quarter, as the company cut the full year expense growth in a minor fashion, now seen up 35-40%.
In August, Pinterest posted a soft set of quarterly results with second quarter revenues up a mere 9%, albeit that the strong dollar hurt sales growth by a percentage point. The company did see meaningful deleverage on the bottom line as a $43 million net loss stands in sharp contrast to a $69 million GAAP profit the year before. The user base was stable at 433 million, that means that it was stable compared to the first quarter. The company guided for mid-single digit growth in sales in the third quarter which combined with further growth in expenses puts continued and severe pressure on the bottom line.
The 662 million shares outstanding now give the company a $13.2 billion equity valuation and with net cash holdings seen around $2.7 billion, the operating asset valuation is seen around $10.5 billion. With sales likely seen around $2.8 billion this year, this works down to a 4 times sales multiple.
After earnings trailing last year’s earnings by $100 million in the first half of the year, one should expect a not so meaningful profit number his year, certainly as sales growth in the near term is harsh, as I peg full year GAAP earnings likely around the flat line.
Concluding Remark
The truth is that Pinterest’s problems are not really related to the soft advertising market as ARPU keeps increasing at a solid pace. The issue is that of a declining user base, yet the company is spending hundreds of millions extra to boost the ecosystem, with so far no results to show for it. This increase in costs stands in sharp contrast to the cost saving measures being announced and implemented by other (social media) firms.
So while the fundamentals remain good, and they still are, the company is facing issues with engagement as it loses so many customers, while it is stepping up expenses to bolster the value of the platform, makes that there are no real earnings to show for.
I am apparently not alone in this as activist investor Elliott Management holds a 9% stake since this summer, looking to drive better monetization, something which the company is really lagging in compared to other platforms. Of interest is that Elliott has taken a stake in PayPal (PYPL) as well, fueling speculation about a deal between both companies. The lower ARPU versus other companies and ability to have more targeted advertisement brings potential to monetize this opportunity much better.
This hidden potential remains, which stands at the basis of my long thesis, which I initiated too early, but have averaged down to $28 here. Hence, I remain patients with Pinterest, expecting some real improvements over time.
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