Summary
Pinterest has seen its shares come into free fall after expected difficult comparables.
The company still delivers on solid revenue growth, as engagement is down, but it seems to stabilize here.
I still like the fundamentals of the platform, and I am doubling down a position here, with or without deal (rumors).
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5./15 WEST/iStock Unreleased via Getty Images When Pinterest ( PINS ) saw its share price crater to the high-fifties in August of this year, I concluded to place the first pin. With shares now down to just $42 at the moment of writing, despite M&A rumors (and actual reported interest from PayPal), it is time to place a second pin. Former Take
Shares of Pinterest were in free fall in August as the company guided for a lower active user base (in the US), with that trend reversal driven by the reopening of the economy, which creates harsh comparable for a social media platform after such a long period of lockdowns and curtailments. As I regard the company as one of the less annoying social media platforms, which still has large (international) monetization room, I found the situation appealing.
My basic enthusiasm on the platform is driven by a few observations. For starters: the company is less annoying than other social media models, the ¨pins¨ create a pull model of content instead of a push model, as this results in higher engagement and more control over content. With payments based on ideas instead of people, the business model has greater longevity with users. Furthermore, it appeared to me that it would attract less regulatory and legislative scrutiny, at least in my view.
Besides a fundamental stronger business model, I believe the ARPU opportunity is huge as well, notably as the gap between US and international revenues is very large, much larger than is the case with other social media platforms.
The pandemic hit the business in a strange way. After posting 35% revenue growth in the first quarter of 2020, growth slowed down to 4% in the second quarter, yet the pandemic from hereon accelerated growth. Third quarter sales were up 58%, as fourth quarter revenues rose 76%, with annualised revenues trending at $2.8 billion, with real earnings seen around $800 million, equal to $1.20 per share. That is not entirely fair either, as the fourth quarter is typically very strong driven by seasonal trends.
First quarter sales in 2021 rose 78% to $485 million, as a GAAP loss of $22 million was reported that quarter, which typically is a softer period. The company guided for second quarter sales growth around 105%, but that is weaker than suggested after a weak comparable in the second quarter of 2020 of course. Second quarter reported sales came in at 125%, as revenues of $613 million were generated on which a $69 million profit was reported.
With 692 million shares trading at $59 in August, a $41 billion equity valuation translated into a $39 billion enterprise valuation, equivalent to 13 times sales (based on my estimate of $3 billion in sales). There was a risk to that number, as sales in the first half of 2021 only came in at $1.1 billion. This risk was real, certainly as the company guided for just 40% revenue growth in the third quarter, with revenues seen around $620 million.
Believing the shortfall, driven by lower activity levels in the US was not due to an actual shortfall of the platform but is actually the result of tougher comparables, I remained upbeat. The long-term trend and the overseas monetization potential remain huge. What Happened?
Since the bombshell report in August, shares have retreated lower to the $50 mark until mid-October as shares briefly spiked to the $65 mark on the back of rumors about an imminent PayPal ( PYPL ) buyout. These rumors were backed up by legitimate claims that the company was pursuing a deal at $70 per share, yet as shares of PayPal immediately came under quite a lot of pressure, making that the deal was impossible to close. With PayPal relatively quickly denying interest to buy the platform, the momentum was short-lived, and the genie was put back into the bottle.
Early in November, the company posted its third quarter results. Revenues rose 43% to $633 million, and thereby came in just ahead of the downbeat guidance, yet the size of the beat was relatively limited, with […]
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