Pinterest: User Engagement Is The Key (NYSE:PINS)

Nov 27, 2023

5./15 WEST

After the takeover of the new CEO Bill Ready, ex-president of Google Commerce and ex-CEO of Venmo and Braintree, Pinterest (NYSE:PINS) has shifted its focus on user engagement rather than solely focusing on growing its user base as the main driver for revenue generation.

In today's analysis, we will assess how the new strategy, strongly focused on increasing users’ engagement and monetization by better integrating the shopping experience, actually affects Pinterest's intrinsic value making it a good investment opportunity.

Despite accounting for 460 million MAU globally, more than 80% of total revenues are generated in the US, which accounts only for 95 million users.

Pinterest revenues breakdown (Pinterest)

Pinterest's user monetization gap between US users and global users is huge, with a median of $5.97 per user generated in the US compared to only $0.34 internationally. Other than the geographical disparity in user monetization, if compared to bigger social networks like Facebook (META), which generates a median of $49 per user in the US and $5.77 internationally, Pinterest seems unable to express its true potential.

Pinterest revenue per user breakdown (Pinterest)

Pinterest is a social media unique on its own. Rather than being a passive platform, Like YouTube and Facebook, where users indirectly get compelled into buying something while being entertained by entertaining content, Pinterest is an active platform where people with an already existing shopping intent purposely seek inspiration for their purchases, basically simulating the shopping mall experience.

While Pinterest is not an e-commerce platform, it operates as an intermediary connecting potential customers and actual e-commerce websites. Thanks to Pinterest advertising services, businesses with already existing e-commerce capabilities, can attract potential customers that seek inspiration on the Pinterest platform.

However, despite having 460 million users who actively want to be compelled into buying something, so far, Pinterest hasn't been able to capitalize on this huge opportunity. As said by the new management:

Pinterest lacked an adequate infrastructure to ease the purchasing process

failing to attract potential advertisers and users, negatively impacting overall platform monetization, especially internationally.

Although Pinterest has been poorly managed in the past, its revenues grew at a respectable CAGR of 42% since 2017, reaching $2.8 billion in 2022.

Pinterest revenue (Pinterest)

The true damage derived from the lack of an integrated shopping experience is mostly reflected by the fact that the company is still struggling to turn its business model profitable, registering an operating loss of $69 million in 2022.

Pinterest operating loss (Pinterest)

Thankfully, under the new CEO Bill Ready, a new strategy aimed to improve user engagement and monetization by better integrating the shopping experience into the platform has been set into action.

By implementing new technological features like mobile deep linking, which redirect users to the advertiser's e-commerce page, and partnerships with third-party advertisers, most notably with Amazon which will contribute to both greater content generation and a seamless checkout experience, Pinterest has been able to outpace its peers in terms of revenues growth despite the macroeconomic headwinds badly affecting the online advertising industry.

Online advertising companies revenues growth rates (Personal Data)

Trying to project Pinterest's future revenues, I started by projecting Pinterest's MAU to be around 750 million by 2032. Combining the lower attractiveness of Pinterest, if compared to social media like Facebook or TikTok, and a major focus on user engagement rather than user growth, I assumed Pinterest's user base to grow modestly in the next years reaching MAU closer to the one of Snapchat (SNAP), currently 750 million, rather than the one of giants like Facebook and TikTok, which accounts for more than a billion users.

Pinterest's users projection (Personal Data)

I then assumed Pinterest's global revenue per user to grow from an average value of $1.6 to around $2.6 per user by 2032. Despite the new strategy to improve user engagement and monetization, is hard to believe Pinterest will be able to replicate the same US user monetization levels in international markets, which typically generate lesser revenues. However, considering how ridiculously insignificant the monetization for international markets is, it's highly plausible to witness global revenues per user improve considerably over the years.

Pinterest's international revenue per user projection (Personal Data)

With these assumptions, revenues are expected to be around $8 billion by 2032, almost tripling in ten years growing at a CAGR of 11.06%.

Pinterest future revenues (Personal Data)

Moving on to efficiency and profitability, Pinterest struggled to turn its business model profitable in the past years, registering a negative median operating margin of -3.1%.

Pinterest operating margin & ROIC (Pinterest)

Looking at the sales to invested capital ratio instead, which shows how much revenue Pinterest can generate for each dollar reinvested into the company, it improved from 0.46 in 2017 to 1.48 in 2022, meaning that Pinterest's business model can growth without excessive capital needs.

Pinterest sales to invested capital (Pinterest)

Projecting these values into the future, I assumed Pinterest to keep running at an operating loss for the next 2/3 years as they’ll need to invest in R&D to develop new technologies to support the new shopping integrations and as they still have to improve the monetization and user engagement of international markets to properly absorb the operating costs.

As Pinterest will achieve greater economies of scale and greater attractivity for advertisers, I assumed the operating income to turn positive and sit around 30%, slightly lower than the 3rd quartile value for the online advertising industry equal to 36%.

Online advertising data (Personal Data)

Regarding the sales to invested capital ratio, I assumed it will decline a little in the foreseeable future as Pinterest has to invest to improve user engagement and international monetization. As Pinterest approaches maturity, I assumed its sales to invested capital ratio to be equal to the 3rd quartile value for the online advertising industry of 1.64 and significantly higher if compared to the ones of giants like Google (GOOGL) and Meta (META), respectively 0.90 and 0.81 in the last five years.

Pinterest future operating margin and sales to invested capital ratio (Personal Data)

With these assumptions, expecting Pinterest to maintain a reinvestment margin of around 3.5% for the coming years, similar to its historical one, to then slowly reduce it as the company approaches maturity, Pinterest's free cash flows to the firm (FCFF) are expected to reach $1.6 billion by 2032.

Pinterest future FCFF (Personal Data)

In the past Pinterest delivered negative FCFF, however, as user monetization and engagement increase, improving both revenue generation and overall efficiency, we can expect the company to start delivering solid cash flows to its shareholders.

Pinterest past FCFF (Personal Data)

Applying a discount rate of 8.83%, calculated using the WACC, we obtain that the present value of these cash flows is equal to $19.1 billion or $28 per share.

Pinterest intrinsic value (Personal Data)

Compared to the current prices, Pinterest's stocks result undervalued by 18.29%.

The last year has been a tough one for online advertising, after the exuberance of 2020 and 2021, propelled by the covid pandemic, high inflation and high macroeconomic uncertainty severely weakened world economies, discouraging many companies from investing in marketing campaigns tightening the belt ahead of a possible recession.

All over the online industry, we have witnessed decimated revenue growth rates followed by massive layoffs to try to reduce costs to mitigate the impact of lower revenues on the bottom line.

Back in the present day, despite inflation rates stopping hiking, uncertainty about the macroeconomic outlook still persists. Until this macro uncertainty will fade away, is unlikely to see a turnaround in companies’ willingness to invest heavily in advertising campaigns, meaning that in the short-term companies like Pinterest, Meta, and Google, whose entire business models rely on online advertising, will keep underperforming by missing market's expectations which will in turn punish the company with significant price corrections.

As regards Pinterest itself, the assumptions I made during the analysis are valid only if Pinterest manage to turn around its business model and drive greater monetization of its users. Being an active social media, where users access the platform only when they need the inspiration to buy something, structurally limits the capacity of Pinterest to engage users like traditional social media offering a passive fruition of entertaining content. As reported by the company itself, only 60% of its monthly active users use the platform weekly.

If Pinterest fails in increasing user engagement, it won't be able to attract advertisers willing to pay for its services resulting in lower revenues, poor efficiency levels and consequentially a lower value for the company.

After the takeover of the new CEO Bill Ready, a new path towards success has been set. Pinterest is currently sitting on immense opportunities to capitalize on its unique platform accounting for more than 460 million users willing to get inspired to buy products they are yet not aware to desire.

So in conclusion, given my analysis and assumptions, if Pinterest's new strategy manages to succeed, at today's prices, Pinterest results to be a good investment opportunity.

This article was written by

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

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