- Pinterest continues to outperform expectations as investments in monetizing users pay off.
- Pinterest could benefit from ad spend shifting from Facebook and Twitter as advertisers seek brand safety.
- There is also potential to capture TV ad spend as usage of linear TV declines.
- The uncertain impact of Apple’s privacy initiatives on advertisers is the biggest risk to Pinterest’s stock price in the short term.
Pinterest’s (NYSE:PINS) stock continues to perform strongly due to continued user growth and improving monetization of users. It has been suggested that Pinterest’s strong performance in 2020 is simply the result of temporary tailwinds, but this view ignores the inherent benefit of Pinterest’s platform to advertisers and the investments the company is making to leverage those benefits. Pinterest should perform well going forward as monetization of international users accelerates, although current prices may be a risky entry point.
Many investors have raised concerns about the sustainability of Pinterest’s user numbers and engagement after the global pandemic ends. It is not clear how much Pinterest actually benefitted from lockdowns in the first place though and these concerns ignore the fundamental changes in Pinterest’s business which have been the real drivers of revenue growth. User growth accelerated modestly during Q2 and Q3 of 2020 but this acceleration mirrored the same periods in 2019. In recent periods Pinterest has witnessed strong growth from resurrected users, as well as from users under the age of 25, who have grown twice as fast as users over 25.
Lockdowns appear to have created some user growth for Pinterest, likely pulling growth forward, and it would be reasonable to expect user growth to be relatively weak over the next 12 months. Usage of Pinterest may moderate somewhat going forward but it will not be to the same extent as some “lockdown” stocks (e-commerce, food delivery, video conferencing).
Figure 1: Pinterest Users
(source: Created by author using data from Pinterest)
Pinterest has noted that there was some uplift in user numbers during Q3 2020 as a result of iOS 14 updates. Pinterest estimated this contributed an incremental 4 million monthly active users globally out of 26 million added during the quarter. Users turned to Pinterest for inspiration for customized backgrounds and as this is a single use case Pinterest also expects these users to be more likely to churn.
Figure 2: Pinterest Users by Geography
(source: Created by author using data from Pinterest)
While user growth has been accelerated by the pandemic, it is much more difficult to say whether revenue has benefitted. If anything, revenue appears to have been below trend in Q1 and Q2 2020 and recovering to in line with trend in Q3 and Q4 2020. It should also be kept in mind that Pinterest is in the process of monetizing previously unmonetized international users and as a result international revenue growth should be expected to be strong over the next few years.
Figure 3: Pinterest Revenue by Geography
(source: Created by author using data from Pinterest)
Revenue growth has not benefited from lockdowns in the same fashion as user growth as demand for advertising inventory was weak during Q1 and Q2 2020. This put downward pressure on ARPUs, which had been trending up due to Pinterest’s evolving advertising technology and increased monetization of users. Pinterest has stated that CPG ad spend began to recover in June and July, while the retail vertical continued to lag. Brand advertisers and large retailers that had paused spend in Q2 have now returned to the platform. The international recovery has been slightly faster than in the United States.
Figure 4: Pinterest ARPU by Geography
(source: Created by author using data from Pinterest)
Similar trends in revenue growth can be observed across social media companies and even ad tech companies like The Trade Desk (TTD). This is indicative of industry wide factors, like an increase in e-commerce, supporting digital advertising.
Figure 5: Social Media Company Revenue
(source: Created by author using data from company reports)
Some investors have expressed concerns over how engaged new users are with the platform and whether they will churn after the pandemic ends. Pinterest is monitoring engagement statistics like the number of searches people perform and the number of boards they create and believes they are healthy compared to previous cohorts. Pinterest has stated that new users are more engaged than previous cohorts but this engagement is correlated with lockdowns (usage is higher during lockdowns). Despite this Pinterest expects the lockdown cohort to perform better than previous cohorts even after netting out the impact of lockdowns.
In July 2020 a civil rights group organized an advertiser boycott of Facebook (FB) called #StopHateForProfit. Over 1,000 advertisers joined the boycott publicly out of Facebook’s 9 million plus total advertisers, while other advertisers reduced spending. Facebook’s top 100 advertisers spent 30 million USD less in July 2020 than the corresponding period in 2019. While it is difficult to separate the effect of the boycott from the effect of the pandemic, it appears that advertising spend on Facebook was reduced by tens of millions of dollars. For a number of companies the boycott is ongoing, with Verizon (VZ), Clorox (CLX), Coca-Cola (KO), HP (HPQ) and Lego still boycotting Facebook in November 2020 and a number of other companies including Target (TGT), Nike (NKE), Netflix (NFLX), Hershey (HSY) and Microsoft (MSFT) continuing to spend significantly less. It is unclear whether the reduced advertising spend on Facebook is materially benefitting Pinterest though as there is a broad range of channels where advertising budgets could have been redeployed, if they have been redeployed at all. Pinterest’s revenue was up 170 million USD QoQ and 162 million USD YoY in Q3 2020, meaning unless a substantial proportion of the boycott advertising spend was reallocated to Pinterest, the boycott is unlikely to be a primary driver of growth.
The expectation amongst many has been that advertiser boycotts of Facebook were temporary and would detract from Pinterest’s growth going forward due to ad spend returning to Facebook. There is an ongoing issue with social media platforms though, where engagement is driven by outrage and if anything, the problems with the social media advertising business model have only become more apparent in recent months. Many users are becoming disillusioned and brands are likely to become even more wary about advertising on these platforms due to negative public sentiment. Platforms like Twitter (TWTR) are at the center of political and free speech debates, whereas people go to Pinterest to think optimistically about their futures. At this stage it is difficult to know how this situation will evolve, but Pinterest is well positioned to capture advertising budgets that do shift from controversial social media platforms.
While there is a lot of focus on temporary factors affecting Pinterest, the larger story is where the company is heading in the future. Pinterest will likely end up with a much larger user base than Twitter or Snapchat (SNAP), probably comparable to Instagram or TikTok, and the platform is a close fit for social commerce. Most social media companies monetize users through advertising, but advertising generally detracts from the user experience. Usage of Pinterest is largely driven by content discovery with an end of goal of purchase, creating a natural fit with advertising. Making Pinterest more shoppable is a strategic priority for the company and long-term there is potential for vertical integration to increase revenue. Pinterest’s long-term vision is to build a full funnel experience, from the moment of inspiration to identifying products that can make that inspiration a reality and then purchasing those products.
Pinterest is developing technology in areas like augmented reality and image recognition to assist users with discovery and shopping. Users can now virtually try on lipstick and eye shadow with Try on-enabled Pins, which are 5x more likely to result in purchase intent than standard Pins. Pinners are 70% more likely to show shopping intent on products tagged in scene images than on standalone Product Pins.
One of Pinterest’s first steps toward improving shoppability has been increasing the inventory of shoppable products on Pinterest and the discoverability of those products. Pinterest is achieving this in part by ingesting more catalogs to get shoppable content onto the service (catalog uploads from businesses increased by more than 350% from Q1 to Q2). Pinterest has also built new features like the Shop tab and the ability to shop from boards to make it easier for Pinners to find this content. Pinterest has so far been focused on the user experience and not monetization, meaning shopping oriented revenue is still a small contributor. It is growing quicker than the overall business though and Pinterest’s CEO expects it to be a major driver of growth in the long term.
As part of this initiative Pinterest partnered with Shopify (SHOP) in May 2020. The partnership allows more than 1 million Shopify merchants to easily set up a presence on Pinterest to upload their catalog. By uploading their catalog feed, merchants make it possible for people to discover and save products and buy directly from their website. The Pinterest app on Shopify includes shopping features like tag installation, catalog ingestion, automatic daily updating of products and an ad buying interface. The number of Pinners who have engaged with shoppable Product Pins has increased 44% year over year and total traffic to retailers has increased by 2.3x year over year.
The decline of linear TV and the ensuing shift in ad spend is likely the next large trend in advertising markets, the question is where will this spend go. Platforms like Roku (ROKU) are likely to capture a significant portion, but Pinterest may also benefit. It is predicted that TV ad spend in the U.S. will decline by 2.1 billion USD over the next three years. If Pinterest can capture even a small portion of this, it will benefit significantly. Pinterest is focusing on improving brand marketing in 2021, which may help the company capture shifting TV ad spend. It provided advertisers with a new tool to conduct first party brand lift studies in 2020, making it easier for advertisers of all sizes to measure the impact of awareness campaigns.
Figure 6: TV Ad Spend in the U.S.
(source: Created by author using data from eMarketer)
There is a lot of technology needed to enable companies like Facebook and Twitter to generate high ARPU. They have ad networks which maximize the value of ad inventory, ensure inventory is matched with demand and also allow off-site advertising to leverage the value of user data. As Pinterest improves its advertising technology, it will likely attract a larger allocation of advertising budgets, although it may take time for advertisers to become comfortable with the platform. It has been claimed that Pinterest underestimated the investment required to create advertising technology comparable to Facebook and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and as a result had an insufficient number of engineers working on the problem.
Apple Privacy Initiative
Apple (AAPL) continues to push for increased privacy under the guise of protecting user data. While increased privacy may be a differentiator for Apple, it is also likely that Apple is simply exercising its competitive strength to increase its stranglehold over the value of the Apple ecosystem. This effort may be to weaken the core business of competitors like Google and Facebook as much as to create additional revenue for Apple.
Once iOS 14’s privacy updates go into effect, App Tracking Transparency ((ATT)) will require user permission for companies to track user data across apps owned by different companies using IDFA. Identifier for Advertisers (IDFA) is a unique Apple ID assigned to every device that persists across a user’s applications. This change is expected to roll out starting in the current quarter. When a similar prompt was introduced by iOS 13 regarding geographic information, opt-in rates to allow sharing “with apps when they’re not in use” plummeted from 100% to below 50%.
In testing we’ve seen more than a 50% drop in Audience Network publisher revenue.
Our studies show, without personalized ads powered by their own data, small businesses could see a cut of over 60% of website sales from ads.
Google is in process of switching to user-tracking software which complies with the new policies. Google does not plan on using IDFA and as such the ATT prompt will not be shown on Google apps.
These privacy efforts will affect all businesses that monetize through targeted advertising and Pinterest will be no exception, as it’s long been majority performance-oriented advertising, meaning traffic conversion optimization and shopping rather than awareness advertising. Pinterest has stated that it expects the opt-in requirement for IDFA sharing will decrease its ability to measure conversion from iOS apps. To combat this, Pinterest is trying to increase its tag presence, build first-party measurement tools, as well as investing in alternative sources of signal and measurement. As Pinterest users exhibit a high degree of purchasing intent and planning behavior, Pinterest should be able to create fairly strong signals on the platform. Bringing shopping onto the platform could help with privacy issues by increasing the signal on the platform.
Apps can also focus specifically on the user consent mechanism and how they can secure high opt-in rates. These changes will only affect a subset of Pinterest’s users (Apple devices) but these are also generally the highest value users.
Pinterest’s strategic priorities are:
- Providing users with inspirational content
- Making Pinterest more engaging and useful
- Serving and diversifying its advertiser base
- Making Pinterest more shoppable
Prior to the pandemic Pinterest was in the process of expanding its sales team in Western Europe to monetize users there. Pinterest is hoping to begin monetizing users in Latin America in the first half of 2021 and a significant majority of international users over the next few years. Part of this is investing in agency tools, as agencies control a large portion of ad spend in international markets. It is not just a case of Pinterest having difficulties monetizing international users, it largely hasn’t even tried to monetize international users yet and this will be a significant source of growth in coming years. Pinterest’s international business grew 146% year over year and now represents 17% of total revenue.
Pinterest continues to make large investments in R&D, with R&D expenses amounting to 23% of revenue in the most recent quarter. Key investment areas for the platform include machine learning, computer vision and the recommendation engine. Machine learning and computer vision technology are aimed at ensuring the right products are matched to inspiring themes. Pinterest is also investing heavily in its advertising products, including the self-serve platform and first and third-party measurement tools.
Pinterest is also investing in conversion optimization or OCPM shopping ads and auto bidding to help diversify its advertiser base. In the future Pinterest envisions having an advertiser bring it their budget, goals and content, and Pinterest automating the rest. Without automatic bidding advertisers have to constantly manage their bid strategy in a dynamic auction. Auto bidding manages this process and aims to get advertisers the most clicks at the lowest possible Cost per Click, while spending their entire budget. Approximately 50% of Pinterest’s traffic objectives were flowing through auto bid in Q2 2020 and about 80% of CPC revenue was going through auto bid in Q3 2020. Auto bid has been a meaningful contributor to Pinterest’s recent performance, especially for small and medium sized businesses. Pinterest’s business initially grew on the back of large omni channel retail and CPG advertisers but improvements in technology are helping the company to expand the number of advertisers and diversify advertising revenue.
Pinterest is also making progress with the video format and has seen a significant increase in viewership of both organic and paid video in recent periods. During Q2, total daily video views, which include both organic and paid, grew over 150% year over year. In Q2 2020 Pinterest introduced new tools for people to publish videos stories and to capitalize on the video trend.
Pinterest currently presents investors with something of a conundrum. The core business is performing strongly and should continue to do so in coming years, but the stock is trading on an unsustainably high multiple. While I believe Pinterest is undervalued and will reward investors in the long term, any stutter in performance will likely result in a significant share price pullback. Based on a discounted cash flow analysis I estimate that Pinterest’s intrinsic value is approximately 98 USD per share.
Pinterest is guiding for 70% plus revenue growth in Q1 2021 and Q2 performance will also be strong due to the relatively weak corresponding period in 2020. This should be supportive of the share price in the first half of 2021 unless Apple’s ATT has an immediate negative impact.
Figure 7: Pinterest Relative Valuation
(source: Created by author using data from Yahoo Finance)
Disclosure: I am/we are long PINS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.