Pinterest Inc. (PINS, Financial) is one of the world’s largest social media platforms with 465 million monthly active users, up 30 million over the last 12 months, which is the highest growth the company has achieved over the past two years.
In this discussion, I will break down its unique business model, Amazon partnership and financials for the second quarter of 2023. Let’s dive in.
Why Pinterest is unique
Pinterest offers a unique platform that caters to both advertisers and consumers.
The company describes itself as the largest “visual search engine.” Users search for a range of inspiring topics, from beauty to fashion and even travel. They then “pin” their favorite images onto selected boards, which helps to increase the growth of the platform overall.
Every post, or pin, contains a direct website link that can be connected to an e-commerce store. This makes Pinterest a growing platform for advertisers who wish to increase their business on alternative channels.
Around 80% of its audience are females from middle to high-income households, which makes the platform especially lucrative for advertisers and brands.
In the second quarter, Pinterest reported particular strength in its “top of funnel” (brand/awareness) advertising. This was driven mainly by companies in the consumer packaged goods industry. Video ads also gained traction, as did its new “Spotlight” takeover ad unit.
Amazon advertising partnership
In April, Amazon.com Inc. (AMZN, Financial) entered a partnership with Pinterest to bring third-party ads to its platform, which could be a real game changer as it seeks to increase the amount of shoppable content available to consumers.
While the partnership is still in its early stages, Pinterest’s management said it will be a multi-quarter implementation process, though live testing has already begun.
As one of the fastest-growing platforms for advertisers that is quickly stealing ad dollars from the top two players, Meta Platforms Inc. (META, Financial) and Alphabet Inc.'s (GOOG, Financial) Google, Amazon is set to benefit as well since its products will gain more exposure.
Growing financials
On Aug. 1, Pinterest reported strong financial results for the second quarter of 2023. Its revenue of $708 million increased by 6% year over year and beat analysts' forecasts by $12.36 million.
By region, the U.S. and Canada contributed the most to sales, generating $565 million, up 4% year over year. This was followed by Europe revenue of $114 million, which grew 12% year over year.
The rest of the world trailed at just $29 million, but did increase by 32% year over year. This shows the company could see huge gains by scaling into other markets.
Breaking down user growth by region, the U.S. contributed to the majority with 95 million monthly active users, up 3% year over year. This was followed by Europe, which achieved 6% growth to 124 million MAUs. Surprisingly, the rest of the world market has a large number of users (246 million), but only contributes to a small portion of revenue due to low monetization strength in countries such as India.
Further, Generation Z was reported as the fastest-growing segment.
AI and product improvements
Pinterest has being using artificial intelligence for its “recommendation engine” for a long time. This combines its first-party data with its search to optimize the relevance of content and advertisements.
The company has also included growth hacks, such as recommended content users are more likely to share. This has helped to reignite dormant users who become engaged by content people they know may have shared.
In the second quarter, Pinterest also launched its guided browser experience. This has helped to improve the user experience and subsequent engagement.
It also launched its Premier Spotlight ad format, which includes a “full takeover” advertisement, and thus entices high engagement. Brands such as HBOMax and Comcast have already started to test the platform.
Pinterest’s overall ad impressions have increased by over 30%, driven by the various new advertising types.
Profitability and balance sheet
Moving on to profitability, Pinterest reported an operating loss of $73.2 million, which was substantially worse than the $34.5 million loss reported in the year-ago quarter. However, it was an improvement from the $243.7 million loss reported in the prior quarter.
In addition, its overall cost of revenue was down 2% quarter over quarter to $164 million, driven by a series of efficiency-focused initiatives.
Operating expenses came in at $440 million, which increased by 5% year over year.
Pinterest’s overall adjusted Ebitda was $107 million, which increased by 130 basis points year over year at a 15% margin.
Looking at the balance sheet, Pinterest reported $2.3 billion in cash, cash equivalents and short-term investments. In addition, the company has total debt of $163 million, which is well covered.
During the quarter, the company completed a $500 million stock buyback program ahead of its deadline.
Moving forward, Pinterest expects a “stabilizing” of the digital ads market, with recovery in certain sectors. The company is guiding for revenue growth in the high single digits with a small foreign exchange rate headwind.
Valuation
Pinterest trades with a price-sales ratio of 6.87, which is lower than its five-year average.
The GF Value Line also indicates a fair value of $42 per share based on its historical ratios, past financial performance and analysts' future earnings projections. Therefore, the stock is undervalued at the time of writing. GuruFocus does warn of a possible value trap, but I believe this is unjustified.
Final thoughts
Pinterest is a great company that is a truly overlooked player when it comes to the social media landscape. I believe the company will continue to gain traction with advertisers and its Amazon partnership should be a major catalyst for the stock over the next 12 months.
