Pinterest (PINS) – Not Just Window Shopping
Pinterest (PINS) – Not Just Window Shopping
Growth acceleration on the horizon
Welcome to Bristlemoon Capital! If you haven’t subscribed, you can join 1,963 others who enjoy our deep dives and investment insights here:
Today we are exploring Pinterest, a great business with an accelerating earnings profile, in our c.16k word deep dive. We have written previously on BROS, MTCH, CPRT, RH, EYE, TTD, and META. Free subscribers will only receive a partial preview (less than one quarter) of our reports. The remainder of our reports, which contain most of the deeper analysis, are reserved for paid subscribers. Consider becoming a paid subscriber for full access to our reports.
Bristlemoon readers can also enjoy a free trial of the Tegus expert call library via this link.
Table of Contents
Introduction
Business Overview
High commercial intent
User base
A look at the Pinterest user experience
Business History
Financials
Business Quality
Network effects
Switching costs
Growth Drivers
Shopping
Higher ad relevance increases ad load potential
Pushing down the funnel into direct response ads
Gaining share of core ad budgets
Third-party partnerships with Amazon, Google (and possibly others)
International monetization opportunity
Google Chrome cookies deprecation
U.S. TikTok ban
Expanding the male audience
Expanding into new verticals
Risks
Valuation
Conclusion
Key Takeaways
Pinterest is a visual search and discovery platform that has 85% of the top 200 advertisers, and the majority of the top 500 internet retailers actively spending on its platform. The company is undergoing a business transition that focuses on providing a seamless handoff to its retailer partners after a user clicks an ad on Pinterest, with the company abandoning its prior strategy of building out a closed-loop shopping experience contained within the Pinterest walled garden. The numerous changes to the platform are significant, and we believe they will materially accelerate revenue and earnings growth.
Pinterest users have very high purchase intent: 50% of them go to Pinterest to shop. Previously the company didn’t have the capabilities to capitalize on its users’ commercial intent. This is rapidly changing with the company’s push towards lower-funnel ad products and more sophisticated ad measurement solutions. This is helping change the historical advertiser perceptions of Pinterest as being just a brand-awareness tool and in the process allowing Pinterest to unlock larger pools of ad budget dollars.
Advertisers typically segment ad budget dollars into two buckets: core and experimental. While Pinterest was historically pigeonholed into the experimental ad bucket (one that is smaller in nature), the strong returns on ad spend that advertisers are now achieving is causing advertisers to shift Pinterest into the core ad bucket. This is hugely significant as advertisers typically spend many multiples with a core advertiser than they will with one that is considered experimental.
Pinterest’s ads partnership with Amazon will help increase Pinterest’s auction density and put upward pressure on CPMs. In this deal, Pinterest, a roughly $3 billion revenue business, is getting access to a portion of the $47 billion ad revenue dollars for Amazon’s ads business. Amazon’s ads business is 15x larger than that of Pinterest and growing at a faster rate, creating the potential for a significant revenue growth acceleration if Pinterest is able to capture even a thin sliver of this pool of dollars.
Consider that 80% of Pinterest users reside outside the U.S. but comprise only 20% of the company’s revenue. We believe that improving international monetization will help drive higher revenue growth rates. Consider that Snap’s Rest of World ARPU was 8x greater than Pinterest’s Rest of World ARPU in FY23, and that Meta’s was 31x higher.
Pinterest is a high quality multisided network business with differentiated supply in the form of user-generated content. Pinterest’s content is global, has a long shelf life, and can be cheaply and easily onboarded, creating immense platform scalability and a content flywheel that’s extremely hard to replicate. User retention on the demand side of the network is aided by switching costs that result from content personalization.
We believe there is a scenario where revenue growth accelerates well beyond the company’s mid-to-high-teens percent growth target over the next five years. If all the combined initiatives were to get traction, we believe that a 25-30% revenue CAGR is possible, with the very high incremental margins on revenues in this bull case scenario supporting a 28% IRR, or 3.2x multiple of money over the next five years.
Introduction
“[W]hat I saw was that Pinterest had a very unique use case, a tremendous amount of commercial intent that had been really untapped and could be a very different kind of ad platform than what it had been previously… Pinterest has solved digital window shopping, but all the stores were closed” – Bill Ready (CEO), Morgan Stanley TMT Conference 2024
Some of the best investment opportunities involve a business experiencing some sort of transition. Change creates uncertainty, and it is this uncertainty that can cause a stock to become mispriced. This mispricing stems from the reluctance of the market to fully reflect the fruits of the business transformation. This might be due to uncertainty and execution risk in realizing value from the business pivot. Or perhaps the market simply fails to appreciate the magnitude of the opportunity unlocked by the changes underway.
Often investors anchor to what the business was in the past, and struggle to envision what the business could become in the future. There is a certain path dependency that exists, particularly for investors who have been invested in the stock. In the case of Pinterest, a stock that experienced a roughly 81% peak to trough drawdown, with the share price falling from $89 per share in February 2021 to $17 per share in June 2022, long-term investors in this business have had an experience characterized by scars and trauma. These are hardly conditions conducive to believing in an imminent business inflection. However, we believe that we are in the early stages of revenues and earnings meaningfully accelerating.
Pinterest has introduced lower-funnel ad formats that are providing solid returns for advertisers in ways that are unlocking incremental ad budget dollars, has added sophistication to its ad stack to better measure these advertiser outcomes, and is in the process of integrating third-party ad demand via its partnerships with Amazon and Google, which we expect will generate significant upward pressure on ad prices. We are seeing Pinterest 1.0 go to Pinterest 2.0 and the evidence of that is observable today.
This business transition requires additional work by investors to underwrite the opportunity before it begins to be reflected in the financial statements (by which point the opportunity will have become obvious). Given the potential upside, we believe it is well worth spending the time to diligence this opportunity.
For the latent value to be unlocked, Pinterest will require an adept leader. To us, Bill Ready is the right person for the job. Ready, who joined Pinterest in June 2022 is well-credentialed; he was previously the President of Commerce at Google and the COO of PayPal. We will explore his strategy, the changes to the business that have occurred under his leadership, and link this to what this could mean financially for the Pinterest equityholder.
Once the business transition gets traction, the stock will likely experience a two-pronged benefit: accelerating earnings growth, which is subsequently rewarded by the market with a higher earnings multiple. We are cognizant that many investors for years have held the thesis of Pinterest better capitalizing on the commercial intent of its users, and this thesis has not worked out for them. However, we are now starting to see evidence of the business model transition playing out in ways that give us confidence in Pinterest as an investment (which we will detail in this report).
Business Overview
Pinterest is a visual search and discovery platform. It basically provides visual ideas (via pictures, and increasingly video, with video content on Pinterest increasing by 170% year-over-year in 2Q23) for things such as recipes, home décor, DIY projects, and many other topics. Users access Pinterest’s platform via the company’s mobile app or the web. Pinterest generates revenue from advertising and has three primary ad surfaces: home feed, search, and related items (roughly a one-third revenue split for each[1]). The company has 85% of the top 200 advertisers and the majority of the top 500 internet retailers actively spending on its platform[2].
People use Pinterest for inspiration. This is often catalyzed by a life event such as a wedding or home remodel, but could also be someone simply looking for inspiration for a new outfit. 61% of Pinterest users say that Pinterest is where they go to start a new project[3]. The typical Pinterest user will go to the platform to find new ideas, and (as we will explore) are increasingly turning those ideas into a reality via the shopping functionality that is being prioritized by the company.
High commercial intent
The fact that many users are coming to Pinterest due to some life event that needs inspiration means that Pinterest users typically have very high purchase intent. According to CEO Bill Ready during an interview with Fast Company, “[m]ore than half of users on Pinterest are there to shop”[4]. Furthermore, the company disclosed back in 2021 that 89% of weekly active users utilize Pinterest for inspiration for their path to purchase[5].
A typical Pinterest user journey on the platform might involve that user searching for a topic or being recommended one by Pinterest. Users can also browse their personalized feeds that reflect their passions and projects. That user then interacts with visual content that the company refers to as “Pins”. There are billions of Pins on Pinterest and this content is user-generated (both by Pinterest users as well as by advertisers).
Users can save these Pins (1.5 billion Pins are saved by users every week[6]) and create a board that reflects a topic (e.g., gift card ideas), which is where users can save, collect and organize their Pins. You can think of this like someone in the early days keeping cutouts from a magazine to build an ideas collage.
Pinterest also has direct messaging functionality so that you can send Pins to other users in the app and interact with them. This collaboration can drive higher engagement: when a user collaborates with other Pinterest users the company noted a 14% increase in engaged sessions and a 33% increase in saves.
Source: Company filings
Pinterest is a traffic kingmaker of sorts for internet retailers. Basically, Pinterest is utilized by users as a discovery engine, and it drives more referral traffic to shopping sites than other social platforms such as Facebook and Snapchat.
Source: Pinterest; GfK, Path to purchase study with weekly Pinners, Dec 2017
Retailers such as Etsy, Wayfair, and many others receive material traffic from Pinterest. In a helpful thread on Pinterest, X (Twitter) user Prepared Remarks (a thoughtful investor you should follow if you don’t already), shared that Etsy sellers receive more traffic from Pinterest than all other social channels combined[7].
Source: X (Twitter) thread[8]
The high commercial intent of Pinterest’s users is reflected in healthy conversion rates (i.e., people being shown an ad and completing a desired action such as clicking the ad) that mirror best-in-class ad platforms like Instagram. Data from Heap back in 2018 benchmarks conversions rates across platforms, with Pinterest achieving strong conversion rates:
Source: Heap
Pinterest ranks even more favorably when looking at conversion rates for smaller sized shopping carts:
Source: Heap
We will explore why these Pinterest ads are so performant, and the changes that have recently boosted Pinterest’s ad performance even further, later in the report.
User base
Pinterest has a lot of users who turn to its platform. In fact, the company boasts 498 million monthly active users from around the world (as of 4Q23). While a large user base is positive, it’s even better if that user base is increasingly tilting towards younger user demographics, particularly as it relates to the longevity of the platform. This is certainly the case with Pinterest: Gen Z users represent over 40% of the company’s user base[9]. Pinterest CEO Bill Ready commented on the unusual phenomenon of Pinterest’s user base aging down:
“It is exceedingly rare to see an app age down. Normally, it's, okay, your user base ages. And then, oh, somebody else comes in and capture the next generation, you sort of age out…We've aged down” – Bill Ready (CEO), Morgan Stanley TMT Conference 2024
Not only are Gen Zs a core Pinterest user group, but this demographic is an increasing mix of overall users. In 2Q23, there were 193 million Gen Z MAUs on Pinterest, growing 19.9% year-over-year. This compares to 272 million non-Gen Z MAUs in 2Q23 which were up just 0.4% year-over-year. In other words, Gen Z users are driving all of the user growth for Pinterest. This is positive when you consider that Gen Z users save Pins 2.4x more compared to the other generations on Pinterest, a sign of higher levels of engagement and intent.
While a healthy mix of Gen Z users bodes well for the health of the platform – both in terms of new user growth but also a longer timeframe to retain and monetize those younger users – it should also be noted that Gen Zs have lower spending power and conversion rates than older generations. Gen Z users might only be at the start of their careers and probably don’t have the financial means to spend the same amounts as older cohorts such as Millennials. For this reason, if we were to think about the profitability per user, Gen Z users on average will likely be less profitable than Millennials.
But profitability per user is distinct from the value per user. There is potentially enormous lifetime value from onboarding these younger users and having them form the habit of using Pinterest to inspire and organize ideas for their hobbies and passions. At some point their spending power should grow, as will the likelihood of them transacting after seeing an ad and thus becoming more profitable users.
As of June 2023, Pinterest’s global user base was 67% female[10], which has remained stable since at least 2019 (the company disclosed that “two-thirds” of its user base were female in its March 2019 S-1). This is a coveted user base: according to survey data, 78% of women identify as their household’s primary shopper[11], meaning they have considerable influence and say over a household’s purchase decisions. These are exactly the people that Pinterest’s advertisers want to reach. We believe there is also an opportunity for Pinterest to expand its male audience which we will explore later in the report.
We would also note that Pinterest’s user base skews wealthier: one-third of luxury shoppers on Pinterest have annual incomes exceeding $100,000[12]. Furthermore, 45% of U.S. social users with a household income of over $100,000 are active on Pinterest[13]. Pinterest also reaches 57% of U.S. females with more than $200,000 in annual income. All of this ties back to a user base with solid spending power. The company claims that its shoppers spend 40% more per month than people on other social platforms[14].
According to a survey by Shopify (albeit one that is rather dated and from 2015), the $50 average order value (AOV) of sales referred from Pinterest to Shopify stores was higher than any other major social channel[15]. A 2019 study by Nosto supported this, with $154 paid and $68 unpaid AOVs for Pinterest eclipsing the $103 paid and $65 unpaid AOVs of Instagram, as well as the $69 paid and $58 unpaid AOVs for Facebook[16]. From the abovementioned Shopify survey, Pinterest was shown to be the second-highest driver of all social referral traffic to Shopify stores, second only to Facebook[17]. This data supports our assertion that the Pinterest user is healthy and of strong interest to advertisers.
Below we can observe the Pinterest monthly active user (MAU) growth over time.
Source: Bristlemoon Capital; Company filings
There are a few things worth noting:
The vast majority of user growth for the periods where data is available (i.e., up until the end of 2021, after which PINS reported only total MAUs) was driven by international users. Between 1Q16 and 4Q21, Pinterest added 304 million MAUs, of which 283 million users came from non-U.S. countries. In other words, international MAUs drove 93% of the incremental user growth over that period.
User growth materially spiked during the COVID period. There was without a doubt a heavy pull forward of users, many of which came to Pinterest via web-based Google searches and who were less engaged and lower monetizing users. There was a subsequent giveback of some of these users which created investor consternation regarding the health of the Pinterest platform (the company stopped guiding for quarterly MAUs in 2Q21 due to a lack of visibility which added fuel to the fire). Note that TMT investors are highly allergic to declining user bases of internet network businesses; these situations can make for fantastic investments if the market is in fact mistaking cyclical forces as structural problems.
As we can see in the chart below from the company’s 2023 Investor Day, Pinterest’s mobile app MAUs have grown at a 19% CAGR over the past four years. The mix of mobile app MAUs has increased from 62% four years ago to over 80% today.
Source: Company filings
This is important. Mobile app users have more than 2x the number of saves per MAU than that of web users. Mobile app users have also historically been more engaged and monetize at higher rates. For example, Shopify has previously reported that 80% of orders referred from Pinterest to Shopify stores came from a mobile device[18].
One final point to note regarding the health of the user base is that Pinterest’s most recent user cohorts are saving content in their first year at 1.99x the rate of new users that joined in 2018. Saves per user can be thought of as a proxy for engagement and purchase intent, so the chart below suggests increasing levels of engagement and intent amongst more recent user cohorts. When you consider the 1.5 billion saves per week that occur on Pinterest (as of June 2023), this implies around 5 saves per week per Weekly Active User[19]. This is encouraging when we consider that there is 28% higher retention for users who save content and then revisit that saved content on Pinterest.
Source: Company filings
A look at the Pinterest user experience
For consumer-facing apps, it would be negligent of us if we didn’t at least download the app and peruse its content. While our opinion of the Pinterest user experience is inconsequential (we are not a part of the core Pinterest user demographic), this exercise of exploring the app is useful to the extent that it shows the variety of ad formats and helps frame the growth opportunity ahead of the business.
Below is what the home screen looks like (note that this is after downloading the app for the first time and the company having no data upon which to base content recommendations). The user experience is slick and easy to navigate.