Pinterest (PINS) is a social media company. It operates a platform with more than 322 million monthly active users, and its business model depends on selling ads.
We at Uncover Alpha find the company one of our top stocks for the long-term.
Unique value proposition
Pinterest is mainly used by users searching for various ideas. Because of this intention, users do not find the ads to be annoying or problematic. On the contrary, users like the ads provided they are tailored to the thing they are looking for.
Pinterest has captured a very compelling audience.
– 71 % of Pinterest users are women. Pinterest captures 83 % of all US women between the ages of 25 – 54. This is a staggering number as this is the audience that makes 80 % of buying decisions in the US household. This makes them a perfect audience for advertisers of furniture, home appliance, baby stuff, fashion, etc.
– Another interesting user group is Dads. 40 % of US dads use Pinterest for searching, shopping, and planning for fatherhood.
We like the audience Pinterest is capturing because ads are not annoying for the mentioned users and the audience has strong buying power and intent. This can convert to much bigger ARPU (average revenue per user) than on other social media platforms such as Facebook or Snapchat.
Acquisition candidate
We believe there is a good case that in the future someone will want to buy Pinterest. The main contender for this is, in our opinion Amazon. The primary reason is that Pinterest is a perfect add-on to an e-commerce company. It completes Amazon’s offering to the seller on its platform (platform for selling + marketing and audience).
Facebook could also be a candidate for buying PINS, however considering the antitrust issues surrounding social media companies at this time, it seems that the deal would have a hard time going through the regulators. Nevertheless, with Facebook launching its app Shops and teaming up with Amazon competitor Shopify (SHOP), we believe Amazon could follow with the notion of a social media powered e-commerce site.
The COVID effect
The Pinterest business has not been immune to the coronavirus and imposed lockdowns. On their latest earnings call, they said, like other social media companies, that the demand for ads fell in March after the lockdowns started and then stabilized in April. At the same time, they also saw an uptick in the user engagement in April because people began to spend more time on social media and searching for ideas on how to decorate their house, buy online, etc.
Although many analysts have been focused on the softer demand for ads in the short term, we at UncoverAlpha concentrate more on the user front. In comparison to Facebook, Pinterest is currently in the phase where users matter more than the revenue they generate from them as they are in the early stages of the platform’s monetization. That is why we find the coronavirus effect positive for the company and not negative. A push to online spending and online purchases bodes well for the company. New user sign-ups and increased user engagement mean that users get more hooked on the platform, and we see this effect going strong also after COVID. Many retail businesses are transitioning to online sales channels due to COVID, and Pinterest captures a great audience if you are in the jewelry, fashion, or household space. With its strong cash position, Pinterest can last a period of soft ad demand with no problems.
Interesting valuation
From a valuation standpoint, when comparing PINS to other similar social media companies like Facebook and Snapchat, we find it compelling. The Price to Sales ratio of PINS is similar to Facebook, which has a much slower growing user base and is in the higher stage of monetization of users than PINS. On the other hand, a similar company in terms of user base size and phase is Snap. They are currently at a much higher P/S ratio of 17.7 compared to PINS 10.44.
When looking at the Gross profit margin, we can also see that PINS is better positioned than Snapchat but is lagging Facebook. The main reason is that PINS has higher cost of goods. This is because their COGS is effected by user growth and not revenue growth. So as long as the user base is growing, the COGS will be higher.
From a growth perspective, it is also evident that Pinterest is the one that is seeing the most significant revenue growth. Although, from our analysis at the current stage of PINS, we value the user number growth more than the revenue because the monetization phase in PINS will come at a later point.
Comparing the most important metric, “the users,” it gives us the following results:
Pinterest number of user end of 2019: Monthly Active Users (“MAU”) 322 million
Pinterest market cap: 13.6 billion
Snapchat MAU: 360 million
Snapchat market cap: 35.5 billion
Facebook MAU: 2600 million
Facebook market cap: 666.7 billion
What we like most is that PINS, when compared to peers, is the cheapest, also looking at the user base. Their ratio of Marketcap/user is 42, Snapchats Market cap/user is 98, and Facebook’s is at 256.
When looking at these numbers, we see Pinterest user base valued at half the one of Snapchat and six times less than Facebook. Also, considering the platform that is made for ads that are not bothering users and growing user base of over 30%, we see the company as attractive from a long-term perspective.
Conclusion
Online shopping is a trend that is growing bigger and bigger every day. With online shopping, online ads are becoming more critical than ever. And while this space is run by two big players that almost have a duopoly: Facebook and Google, we believe Pinterest with its unique audience is and will be very interesting for advertisers as they try to find new and more effective ads channels. With the latest moves, we also see significant potential in e-commerce players moving and joining social media and e-commerce platforms to offer a joined offering to businesses selling online. With its market cap and big growing user base, we believe Pinterest will benefit these trends further and on the same page is a good acquisition candidate. We bought the stock and are long Pinterest.
Disclosure: The author of this post is long PINS. I wrote this
article myself, and it expresses my opinions. I am not receiving compensation
for it. I have no business relationship with any company whose stock is
mentioned in this article. This is not financial advice. Please read the
Disclaimer.
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