A new position that I started in 2021 is Pinterest (PINS). This is a stock that was up 290% in 2020. So, you might think that I am late to the party. But let me tell you that most of my gains have come from positions that were already up huge. In the past that used to scare me into starting a new position thinking that I had missed the upside but later I came to realize that businesses that tend to win usually keep winning for a long time. Think Amazon, Apple, Tesla, Adobe and so many other giants.
Most of you will be familiar with Pinterest. Their primary source of revenue is advertising dollars. One thing that piqued my interest in PINS compared to other social media channels such as Facebook, Twitter and Instagram is that people go to Pinterest to get ideas. Pinterest is not the place to read the news or debate politics with your cousin or compare yourself to other people. It is a positive place to be inspired and get ideas in your future life. Businesses appreciate that Pinterest is a positive place where people are coming to get new ideas for their life so they are happy to allocate some of their advertising spend on Pinterest. You can see that in the results that they reported last week.
PINS reported earnings after market close on April 27th and the stock fell about 15%. In this article, I talk about why I view this as an opportunity to add to my position after reviewing the earnings report and earning call.
First the Q1 2021 results
- Revenue for the quarter was $485 million up 78% from Q1 2020.
- Monthly Active Users (MAUs) 478 million up 30% from Q1 2020.
- Net Loss of $22 million vs $141 million in Q1 2020. You might be wondering why I am investing in a company that is making losses. Companies that are growing in their initial years need to invest as much as possible to sustain growth and that might result in some losses in those initial years. As you can see the loss is decreasing from $141m to $22m so they are moving in the right direction.
- A better number to judge their operations is cash flows from their operations and this number was up to $271m from $57m in Q1 2020. That is more than a quadruple.
- Management provided guidance for Q2 2021 that they are looking to grow their revenues in Q2 2021 105% from Q2 2020. That is more than a double.
You might be thinking these look like excellent results. Why did the stock fall more than 15% after the report? My guess is that the market got spooked by these statements that management made in the earnings call.
“In Q2, we expect global MAUs to grow in the mid-teens and US MAUs to be around flat on a year-over-year percentage basis. Finally, we expect sequential operating expense growth to accelerate in Q2 as we continue to ramp investments in our long-term initiatives and growth drivers.
Starting in mid-March, the easing of pandemic restrictions slowed US MAU growth and lowered engagement year over year as people spent less time online. In Q1, we saw good retention of the MAUs we gained during 2020, but we still don’t know if or how long this retention will last. Our understanding of future engagement levels is similarly limited.”
Translation: Management believes that their monthly active users may stay around the same level in Q2 since they experienced a huge growth in their users in 2020.
As you know that the stock market is all about the future and does not care what you have done in the past. Market also hates uncertainty. So, what Pinterest is saying in these statements is when we were in the pandemic, everyone had a lot of time on their hands and that is why they spent so much time on Pinterest. Now that economy is reopening in different parts of the world, they are not sure about whether their users will be able to spend that much time on their platform. So, they are predicting that their monthly active users will remain flat year over year (that means no growth from Q2 2020). For context, this is how their MAU growth looks like for the last three years
|2019||291m||300m (3%)||322m (7%)||335m (4%)|
|2020||367m (10%)||416m (13%)||442m (6%)||459m (4%)|
As you can see their MAUs have been growing in single digits before the pandemic and during the pandemic they saw growth in double digits so the management believes that this was a pull forward due to pandemic and they are unable to predict what will happen in Q2 2021 with their MAU growth so they are going with a conservative guidance of flat growth in Q2. I think this is what is spooking the market. But the market is ignoring the increase in their revenue growth. This is how their Average Revenue Per User (ARPU) looks like over past three years
US ARPU Growth
|2019||$2.25 (42%)||$2.80 (41%)||$2.93 (26%)||$4.00 (27%)|
|2020||$2.66 (18%)||$2.50 (-11%)||$3.85 (31%)||$5.94 (49%)|
As you can see this number is headed in the right direction. PINS management is able to monetize their subscribers and their ARPU is headed in the right direction. Except for one quarter in 2020 (in the peak of pandemic when lockdowns started), all quarters have seen a better ARPU growth than the comparable quarter in the previous year. Another thing you should notice is that the growth is seasonal. Usually, Q1 produces their smallest ARPU number every year and their Q4 is the best quarter as you can imagine, people would log on to Pinterest to get ideas about Halloween, Thanksgiving, holidays etc. and therefore advertisers would spend more money to attract those users.
For better context, Facebook ARPU was around $30 in 2020 and has grown from about $20 in 2017.
International ARPU Growth
|2019||$0.08 (60%)||$0.11 (120%)||$0.13 (117%)||$0.21 (133%)|
|2020||$0.13 (63%)||$0.14 (27%)||$0.21 (62%)||$0.35 (67%)|
The story of their international numbers is even better as things are headed in the right direction. Although their international revenues are a fraction of the U.S. revenues. Management did mention on the call that they have been focused more on the U.S. market but this year they started serving ads in Brazil this quarter and later this year they will move in other Latin American markets. Their international revenues make up 20% of their total revenues so there is room for growth there.
All in all, even if management thinking is true, that their MAUs will remain flat in Q2, this is a company that is expecting to double its Q2 2020 revenues in the next quarter. Their Average Revenue Per User is rising steadily. Q1 is historically their weakest quarter so we can expect better days ahead in 2021. Putting all this in perspective, I am adding to my new PINS holding most likely this week and will look to add on further drops. I think I will be happy in three years that I bought more PINS after Q1 2021.
What do you think? Do you agree with this call? Let me know by commenting below.