Investing in Pinterest - The Next Facebook?
Updated: Jan 24, 2022
Pinterest - The Next Social Media Juggernaut?
Social media is a phrase that, 15 years ago, equated to an ad in a newspaper. Facebook was in its nascent stages as a college-only place to find classmates, and the world was hot on the heels of being friends with Tom on MySpace. Fast forward to the mid-2010's and, all of a sudden, these sites are central to our lives and how we function online. Today, I'm going to dive into an established social media player that is still in its early stages as a public company to see if this is the next Facebook, or if it has a Snap-like fall from grace in its future. We'll also take a look at the sector as a whole to figure out why all of these high-flying companies have suddenly been grounded in the last few months. This is everyone's favorite purveyor of digital vision boards. Let's dive into Pinterest.
2020 Full Year Revenue: $1.69 billion (+48.12% YoY)
2020 Full Year Net Income: -$128.32 million (+90.57% YoY)
Q2 2021 Revenue: $613.21 million (+125% YoY)
Q2 2021 Net Income: $69.42 million (+168.9% YoY)
How Did Pinterest Get Started?
In tech company terms, this one's a dinosaur. Founded way back in the prehistoric year of 2009, founders Ben Silbermann, Paul Sciarra and Evan Sharp began coding out of an apartment in, where you ask? You guessed it! Welcome to the little too sunny, always on fire hellscape of Silicon Valley. However, in a nice change of pace, Silbermann was actually a Yale grad instead of a Stanford dropout, so that's different.
Silbermann channeled his childhood love of collecting things into a side project while working as part of Google's online advertising division. After a few failures and false starts, it was Sharp who came in as a third partner and pitched the idea of a digital pinboard. From there, Pinterest was born.
Released as a beta in 2010, the site quickly grew to over 10,000 users, apparently indicating that there was an extreme need for a digital vision board for goal-oriented Type-A weirdos. The app came in 2011 and growth exploded, landing them in Time Magazine as a "50 Best Websites of the Year" winner. The site was also invite-only, with new users having to be referred by existing users, creating the exclusivity that Google+ could only dream of. In 2012, they removed the need for invites and added business accounts in a shrewd move to foreshadow what came next: advertising!
All that advertising paid off, because in 2019, the company went public at a $12 billion valuation, sending its founders into the three-comma club.
What's The Business?
If you don't have it by now then you probably won't get it at all, but Pinterest is a digital pinboard and image-sharing website. While they don't consider themselves a "social network," it's a place to socially share images and ideas to your network. Their recommendation engine serves up images and concepts that it thinks you would enjoy from both personal and corporate accounts, including dedicated slots for paid advertising. From this recommendation page, you can save, or "pin," these images to boards that you create, eventually generating themed pages that you have curated on your own.
Will I Invest In Pinterest?
This company is so interesting to me, because it's social media without the gross parts. While Facebook has turned into a forum for racist grandparents and Twitter is screaming into the pornographic void, Pinterest is just generally a nice place to be. It's endless scrolling feature includes a nice mix of images and videos that are pretty quickly curated to your specific tastes, and I think the pinboard concept is pretty interesting. Where this company gets intriguing is around the advertising side.
When Facebook first rolled out its advertising platform (changing the social media landscape forever), it did it in a few ways: first, it rolled out in-feed ads that were designed to look like posts from normal people. Second, it rolled out "FBX" which was their response to digital display banners, except just on Facebook. While FBX was eventually canned, they did keep the ads on the right-hand rail of the site in order to maximize ad space. It's similar on Twitter, where there are native ads and then there are totally out-of-place sponsored ads and for-pay hashtags. Instagram is a little better at this, but the king of the ad that fits seamlessly into the organic content is Pinterest. The site lends itself to an eclectic mix of pretty much everything: home renovation, infographics, vacation destinations, attractive women, nice watches, etc. It's aspirational in nature, rather than enviable like Instagram, which lends itself nicely to colorful, varied imagery. Where I'm going with this: branded advertising fits in extremely nicely on this platform. There's no right-hand rail, no sponsored hashtags or trends, just imagery and video that is seamless to the user experience. And this is important, because a user is less likely to swipe right through an ad if it's actually relevant and good to look at.
Pinterest has taken note of this unique relationship between its audience and ads and is in the process of squeezing every drop out of it. Pinterest rolled out "Collections Ads," which highlight collections of products that integrate with the spirit of Pinterest, serving as a company-curated mini-pinboard full of things you can buy. They've also jumped into the influencer-economy, recently rolling out "Idea Ads" that indicate a paid partnership between an influencer and the company that's paying them the big bucks. Next up, unique to Pinterest are "One-Tap" pins where you can tap on the image of an item you like in an ad and the user will immediately be prompted to purchase that item with a single tap. Finally, like every other company under the sun, they're branching into augmented reality to let users see furniture in their home, or how makeup looks on them before they buy it.
Actually, let's chat about the user for a second. Relatively speaking, the Pinterest audience is small, but mighty. Compared to Facebook's 2 billion daily active users, Pinterest's 478 million monthly active users is barley enough to populate the social media equivalent of Rhode Island. It's when you dig deeper into the demographics, however, that you realize this audience is very powerful. 77% of their audience is female, and 46% of adult women in the U.S claim to use the platform. From an advertising perspective, this is enticing, as women account for over 89% of annual household spending, with that gap continuing to expand. Additionally, Pinterest users report the highest average household income of any social media platforms' audiences, clocking in at over $75k per year. Finally, 85% of users report using the platform to directly plan a new project, whether that's a craft project or a home renovation, and the ability to go ahead and purchase items they've already been looking at through the platform is a growth driver for them. Pinterest essentially has a stranglehold on the richest segment of people who are more likely to spend money and are hyper engaged and motivated, which is a great place to be as an advertiser. As a result, advertising is booming.
Pinterest's annual revenue is accelerating. Fast. Filed in their S-1 was revenue data from full-year 2016-2018, and inclusive of their 2019 numbers prior to going public. Since then, we have updated numbers thanks to this breakdown from Omnicore:
Their most recent earnings report showed little signs of this revenue slowing down. Their Q2 revenue continued to skyrocket, jumping 125% year over year to $613 million, and management is guiding for even greater growth in the Q3 report, which is up against a much tougher Q3 2020 yearly comparison. All of this also translates to their EBITDA clocking in at $178 million, absolutely vaulting over last year's comparison of a $34 million loss. Analysts are equally pleased with the growth the company has been experiencing, and now forecast an annualized revenue growth rate of around 50% in the next five years, indicating just insane growth levels from this company.
If you're priced for growth, you'd better achieve it! And that's lofty, considering where Pinterest currently stands. At a PE ratio of 212, this company is expensive as hell. That's even considering its current levels, which is a 30% pullback from its all time highs from earlier this year.
That's actually been the case across the entire social media industry, with the exception of Snap who is on the weirdest comeback tear since Crocs. The reason for this is is due to the oddity that was 2020. Last year presented a once-in-a-lifetime opportunity for social media networks because everyone was trapped inside with nothing to do except doom-scroll. As a result, social media networks experienced a curious phenomenon where their daily active users dramatically increased, but spend from advertisers dramatically decreased as a result of advertising budgets being cut during the uncertainty of the pandemic. This now lines up some bizarre comps that the networks have to deal with this year in their earnings' reports, leading to slowdowns in daily/monthly active users with people going back outside, but increases in the advertising spend on the platforms. This is why Pinterest is in a bit of a precarious position: the insane advertising growth rates the platform experienced in Q1 and Q2 of this year really don't mean anything because last year's quarters were so weak. Q3 is the real growth test, as Q3 of last year is when companies began to pour dollars back into the advertising economy. Additionally, the company has seen a slowdown in its monthly active users, with the platform actually contracting for the first time by 4% as a result of the "pandemic effect."
Something else Pinterest and the social media ecosystem at large had to deal with this year? Censorship. Pinterest has not escaped the "fake news" issues that plague the other networks, and they've been thrust into the limelight around their treatment of specific groups. In 2018, they began blocking accounts pumping health-based misinformation, including unproven cancer treatments and unregulated supplements. In 2019, the floodgates opened when they presciently took on the anti-vaccination crowd, blocking searches for any related queries and removing pins that associated with any claims not backed by scientific research. Turns out they were just two years too early on that one. Next up: permanently suspending pro-life activist group Live Action, which Pinterest says "violated their terms of service for harassment or violence."
Finally, the company has a very spotty track record regarding discrimination in the workplace. They've been hit with several high-profile lawsuits around the issue, including whistle-blower retribution issues for those that spoke out against racist/discriminatory behavior. This culminated in a 2020 lawsuit that saw the company pay out a record $20 million to its former COO who sued them for "rampant discrimination, hostile work environment and misogyny."
The Bottom Line
Putting aside the moral dubiousness of the workplace aside, this is a growth company that absolutely needs to be on your radar. They are in an industry that continues its rampant growth, and they're one of the smaller players that is still established, so it has room to expand rapidly. Their constant product roll-outs that make it easier for a user to purchase items on-platform is appealing to advertisers, and that's proven out in the insane revenue growth the company has experienced every year since 2016. While it is expensive, even with the pullback in share price and users, that isn't enough to scare me off with a long-term mindset. Pinterest is primed and ready to explode, and should have a place in your portfolio.
The following article is for entertainment purposes only. Please do not buy or sell a security based solely on what you read here. Please do your own research prior to trading. The author has a long position in Pinterest (NASDAQ: PINS).