Pinterest (PINS) released its third quarter earnings on Monday 30 October, revealing that it beat analyst expectations. Its share price jumped 18% at the open on October 31. Morningstar’s analyst Ali Mogharabi has looked at the company’s earnings report.
Pinterest’s network effect strengthened further during the third quarter, demonstrated by strong top- and bottom-line results on the back of user growth, better engagement, and higher monetisation. The solid revenue growth created operating leverage and margin expansion, which management stated will continue, supporting our assumptions. In addition to the impressive results, some comments from the firm also confirm our belief that hesitancy on the part of advertisers is declining, which is good news for the overall advertising market.
Regarding the firm’s platform specifically, more advertisers are connecting their marketing data with Pinterest, which in our view indicates confidence by the advertisers and their plans to spend more on the platform in the long run. We slightly increased our projections, which resulted in a $37 fair value estimate, up from $36.
Pinterest reported total revenue of $763 million, up 11% year over year, as its user count increased in the US and Canada (up 1%) and in the international markets (up 10%), indicating that while questions continue to surround the economic environment, consumers are still planning to spend. Pinterest also further increased the ad space on the app, which when combined with more users and user engagement drove ad impressions sold 26% above last year. The price of ads declined 12%, but that marked an improvement from the 20% decline in the second quarter, demonstrating higher demand. In response to what consumers are showing, advertisers are a bit less pessimistic. All of this resulted in a 3% increase in user monetisation across the US and Canada (up 5%) and the international markets (up 20%).
As Pinterest continued its cloud and overall cost control management, strong revenue growth created operating leverage and expanded adjusted EBITDA margin to 24% from 11% last year.
Key Morningstar Metrics for Pinterest
• Fair Value Estimate: $37.00;
• Morningstar Rating: 4 stars;
• Morningstar Economic Moat Rating: Narrow;
• Morningstar Uncertainty Rating: Very High.
Business Strategy and Outlook
Pinterest, an online product and idea discovery company, is focused on carving out a piece of the global digital advertising space. While we don't expect Pinterest to displace online advertising behemoths Google and Facebook or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending, which we estimate is an addressable market of more than $600 billion.
Pinterest has a narrow economic moat and stable moat trend based on network effects and intangible assets (data), which we think can eventually drive the company to profitability and excess returns on invested capital. With more than 475 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the firm can attract more online ad dollars. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel – from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the firm to gradually increase its share of the US digital advertising market, as well as grow internationally (mainly in Europe) in terms of both users and ad dollars collected from this audience.
As a platform for content sharing, a big risk for Pinterest is that the firm is susceptible to blame for spreading misinformation via pins. Additionally, by having an international audience, Pinterest is subject to Europe's General Data Protection Regulation plus regulations passed and more being proposed by US lawmakers surrounding data privacy and security. Still, there has been little public outcry based on how Pinterest uses pinners' data and whom this may be shared with.
Financial Strength
At the end of 2022, Pinterest had cash and cash equivalents of $2.7 billion and no debt. The firm generated $469 million in cash from operations in 2022, down from $753 million the year before mainly due to a significant slowdown in revenue growth and the firm’s investments in advertiser and user product enhancements. The firm remained free cash flow positive in 2022. We expect free cash flow to equity holders will average 26% of sales through 2027, but do not foresee the firm paying dividends for the foreseeable future. Pinterest’s Board authorised a 12-month $500 million share repurchase program in the first quarter of 2023.
