Pinterest: Rally On (NYSE:PINS) | Seeking Alpha

Pinterest Blows Out 2Q Numbers

Pinterest (NYSE:PINS) shares skyrocketed a staggering ~37% in a single day of trading, its best trading day ever, following a blowout 2Q print. Domestic weakness was mostly expected, but international growth was extremely strong. Let’s briefly go over the numbers.

  • EPS (non-GAAP): -$0.07 vs. -$0.13 expected (~46.1% BEAT)
  • Revenue: $272.5M vs. $254.8M expected (~6.9% BEAT)
  • MAUs: 416M vs. 379M expected (~9.8% BEAT)
  • Global ARPU: $0.70/MAU vs. $0.67/MAU expected (~4.5% BEAT)
  • 3Q Revenue Guide: mid-30s percentage Y/Y growth

In general, Pinterest’s 2Q report was a blowout print, with revenue, EPS, and MAUs (monthly active users) all destroying expectations. That being said, the one gray area it seems for Pinterest was ARPU. Global ARPU came in a little light relative to the year-ago period. This was likely driven by domestic weakness from reduced U.S. advertiser budgets. This was more than offset, however, by Pinterest’s heavy pick-up in international business. ARPU grew at a 21% Y/Y pace, while MAUs upticked ~16% sequentially overseas. This combination of strong international advertiser appetite with strong user growth fueled a combined 49% Y/Y growth in Pinterest’s international business. This was enough to offset the weakness Pinterest experienced in its domestic market, with total revenue growth trends remaining positive in a drastically weak 2Q for the advertising industry as a whole.

And finally, Pinterest anticipates 30% Y/Y revenue growth in 3Q. So, the company is anticipating a strong rebound in advertiser demand in 3Q. Usage trends should be solid as well. This combination will likely lead to outsized revenue numbers in the back half of this year.

Conference Call Breakdown

The first thing to note with Pinterest is CFO Todd Morgenfeld’s commentary on advertiser demand recovery (emphasis added by author).

Starting with Q2 revenue, we saw advertiser demand improve each month of the quarter. April was the weakest month in the immediate aftermath of sheltering in place. May growth rates improved and June showed further improvement. In July, we’ve seen a sharp acceleration in revenue to about 50% year-over-year growth, through July 29. – CFO Todd Morgenfeld

There are two things to note with this comment. First of all, Pinterest’s recovery has not been choppy. Demand seems to have bottomed out in April, with a steady and gradual recovery in May and June, leading into an even stronger July. Speaking of which, July has been a very strong month for ad demand, with revenues accelerating (yet again) to a 50% y/y growth rate. This is very impressive.

On top of the macro driven recovery and advertising demand, we’re seeing a lot of demand for Pinterest ad products in particular. Here’s what our advertisers are telling us. First, our ads are working, especially for marketers seeking sales and conversions. The investments we’ve made in conversion optimization or OCPM shopping ads and auto bids are making it easier for these advertisers to hit their goals.

In a world where their balance sheets are at risk, marketers want ROI accountable ads and we are delivering them. This has bolstered our ability to attract performance oriented medium-sized advertisers, a group that emerged as a key driver of our resilience in Q2.

– CFO Todd Morgenfeld

Pinterest’s push into programmatic and auction-based advertising (which is the standard for most social media platforms) has been quite successful with advertisers it seems. Improving programmatic advertising options has led to an increase of SMB (small and medium size business) advertisers. While big brands were reducing marketing budgets, SMB advertisers led the charge for Pinterest in 2Q.

Finally, advertisers feel Pinterest is brand space relative to other platforms. In a moment where there is a lot of hostile political conversation happening on social media, advertisers are looking for new places to put their dollars. We benefited from this in July.

– CFO Todd Morgenfeld

When large brands began pulling ad spend from social media platforms in general, Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) specifically, it seems like advertisers moved ad spend to controversy-free platforms like Pinterest. The interesting thing is, the majority of this advertiser boycott happened in July, 3Q. So this didn’t necessarily impact 2Q financials, but will likely be a 3Q tailwind.

As I noted earlier, we expect that revenue will grow in the mid-30s percent range year-over-year in Q3, which implies a deceleration from the roughly 50% year-over-year growth rate we’ve seen quarter to-date through July. Let me unpack this. One month may not be representative of the full quarter and there’s significant uncertainty for the following reasons.

First, cases of COVID-19 arising and any new lockdowns would likely have a negative impact on advertiser demand. Second, our main seasonal moment in Q3 back-to-school will likely look very different this year, as schools across the U.S. embrace distance learning. This could lower both engagement and advertiser demand.

Third, it’s not clear, if or how long the tailwind we’ve experienced in July from advertisers boycotting social media will last. Finally, revenue growth in August and September 2019 was stronger relative to July 2019, when a product change briefly lowered our conversion optimization revenue. So year-over-year comparisons will be harder for remainder of the quarter.

– CFO Todd Morgenfeld

While Pinterest has seen incredibly strong revenue growth through the end of July, anticipate slowing revenue growth as the quarter progresses.

Long-Term Case

In my view, the long-term bull-case for Pinterest is one of the strongest in the entire social media landscape. There are a few reasons for this:

  • controversy-free
  • consumers want ads
  • direct shopping tie-in
  • scale
  • female user population (household consumption driver)

As we have seen recently with the ad boycott, advertisers are becoming increasingly sensitive about what platforms they are putting their content on. Pinterest has remained an apolitical controversy-free platform since inception, while most of its competitors have been bathed in controversy. This likely creates a unique value proposition for Pinterest, as advertising on Pinterest wouldn’t have a negative PR backlash.

One of the most important factors in the Pinterest value proposition is the fact that consumer interaction with ads is likely greater. Why? Well, we have to understand why people use Pinterest in the first place. To get ideas. Whether it be home decoration or stylistic clothes, people go on Pinterest (essentially) to get ideas and inspiration. This means users are actively hunting down content. If there is a piece of relevant, and sponsored content (i.e. ads) they are more likely to click on it than on a site where the goal is to interact with friends online. Because consumers are more likely to want targeted, relevant ads on the platform, advertisers will likely find themselves paying a premium long term in terms of CPMs. No other platform out there offers this dynamic.

The third factor is moving down-funnel in the purchasing process, with direct purchasing options through the Pinterest platform. Pinterest is trying to move down-funnel with its partnership with Shopify (NYSE:SHOP). One million merchants can now sell through Pinterest via its Shoppable Pins. Integrating third-party merchants into the Pinterest platform will likely drive continued ARPU growth and monetization.

Another thing Pinterest has going for it is its scale. It has 416 million monthly active users.

(Source)

Pinterest’s scale, and access to FP (first party) user data is another competitive advantage the company has over smaller advertisers. We will likely continue to see user growth as Pinterest’s international platform continues to gain relevance, as well as its domestic business.

And finally, Pinterest has a very unique demographic. 71% of Pinterest users are female users. This is an interesting dynamic, as most other social media platforms are split mostly 50-50. Considering the fact that women are the core household consumption drivers, Pinterest has a unique and coveted demographic that no other social media platform has at scale. This is another reason that Pinterest is a solid value proposition for advertisers.

Valuation

Now that we understand how good the quarter was, and how strong the fundamental picture looks, how do we value a strong growth company like Pinterest? Right now, analysts anticipate ~28% y/y revenue growth in a coronavirus injured advertising market for 2020. In 2021, consensus expectations are at ~32% y/y. So, we are looking at an acceleration in growth off of an already high growth rate. My personal expectation is for even more explosive growth in 2021. Currently I’m modeling $2.145 billion in FY’21 revenue, which is above the $1.92 billion consensus. I expect this beat to be driven by the Shopify partnership, strong user growth, and programmatic ad purchasing expansion. The advertising is market massive, particularly for social media. So, as long as Pinterest continues to differentiate itself as a platform for advertisers, the company should continue to see 30%+ revenue growth for years to come. Because of this high long-term growth rate, higher gross margin, and faster path to strong operating leverage, Pinterest deserves a higher multiple relative to peers.

ChartData by YCharts

While I don’t believe it should trade at the high end of the range, I believe that considering Pinterest’s strong long-term growth in a large market, a multiple closer to 13x ’21 revenues is warranted. On $2.145 billion in revenue, this brings me to a market cap of $27.885 billion. On an outstanding share count of 586.737 million, Pinterest is worth $47.52/share, upside of ~32%. Thus, my price target on Pinterest is $47, and my rating remains a buy.

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.

Additional disclosure: I am not a financial advisor. This is not financial advice. Please do not interpret this as financial advice. Do your own due diligence before initiating a position in any of the securities mentioned.

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