Today, I want to round out the “Gig Economy” portion of the 21 Disruptors Index and tell you why I’m bullish on Pinterest (PINS).
Like Uber and Airbnb, Pinterest is a stock that’s extremely overlooked for a few key reasons.
At Pinterest, 2022 was a pivotal year to say the least. After coming off a red-hot 2021, unfavorable macro conditions became a major challenge. As a result, Pinterest hired a new CEO back in June, and have a very solid game plan heading into 2023. We’ll get to that in a minute.
What Is Pinterest?
The way I’ve thought about Pinterest from an investment standpoint is as a “Catalog 2.0” that focuses on DIY projects. Essentially, they specialize in ideas.
If you want ideas for outfits, home renovations, crafts, parties, recipes, or any type of decorating, Pinterest is your go-to. They’ve basically created their own industry, and really have little to no direct competition (one of the top qualifiers I have for the Disruptors).
The way their management puts it, Pinterest has an advantage over other social media/gig economy websites because their customers are specifically browsing for ideas. They may not know exactly what they want, but they’ll know it when they see it. And like any company worth investing in, Pinterest wants to make it easy for their customers by giving them the best selection of ideas possible.
Pinterest has also become prime real estate for some large retail companies. By using their newly launched “Pinterest Trends” feature, Ashley Furniture started seeing a huge increase in engagement from online shoppers, leading to a 12% jump in sales via their Trends advertisements.
Everyone from big companies to individual DIY experts and hobbyists can use Pinterest to reach not just a massive audience, but an audience of 445 million users who are actively looking for related products. At that point, it’s almost like a partnership.
The Plan
Heading into 2023, increasing personalization is one of Pinterest’s top goals. For example, if someone is interested in certain jeans, show them clothes that go best with those jeans. Obviously, if they can show customers more of what they want to see (and even better, show them relevant things that they weren’t already aware of), that’s going to help their business grow. Ultimately, this will drive user engagement.
Another goal is to improve the incentives to advertise on their platform. In other words, to pay companies and individuals more efficiently.
These two primary goals feed off of each other; if people see more relevant ads, they’ll buy more, which will result in advertisers making more money.
This plan is relatively new – the new CEO announced it less than 6 months ago – however, it’s already showing success.
First, Pinterest has already seen improvement with the effectiveness of their ads; in Q3, ad conversions grew by more than 20% year-over-year. They also saw year-over-year active user (the aforementioned 445 million) growth for the first time in a year.
In addition to that, revenue per user was up 10.6% year-over-year. There’s massive room for growth here as well; 52% of their users are outside the US, Canada, and Europe (referred to as the “Rest of World” segment), but those users only account for 3.5% of their revenue.
Overall, after a few quarters of stagnation (which, let’s be fair, 2021 was somewhat of an anomaly), it’s great to see that they’re back to growing their customer base, as well as getting more engagement from users.
Pinterest’s Huge Advantage
An obvious advantage for Pinterest is their gigantic customer base. Related to that is the fact that an increasing amount of people and companies want to reach that huge customer base with their products and ideas.
However, there’s one thing that really stands out: the vast number of products for sale.
This is driven by the flywheel effect that I just mentioned: lots of people use Pinterest, therefore people want to sell more products on it, which expands their selection and attracts more users.
Going back to their plan, one of their main goals is to improve user engagement. The main way to do this is to improve personalization, but there’s another interesting way they’re making users’ experience better. This is what Pinterest refers to as “shopability.”
Essentially, they want to have every product that you see on the platform available for sale; all you have to do is click on it. So, if someone posts a picture of a certain Christmas dinner setup, you’ll be able to click on the table, chairs, plates, silverware, etc., see a description of it, and buy it.
It’s as close to being at an actual department store as you can get online, except it has the potential to be every department store as well as independent creators’ products. That’s something that will revolutionize online shopping, and Pinterest is by far the leader in making it reality.
Currently, they have over 1 billion items in their total online shopping catalog (I’ll admit, it blew me away when I saw that!), so they’re already well on their way to achieving their goal. To put that in perspective, Amazon has about 12 million items for sale.
Pristine Financials
You could sell the best products in the world, but if your financials are a mess, one bad year could put you out of business. That’s why I consider strong financials another one of the most important qualities of a Disruptor.
Thankfully, Pinterest excels in the financial department as well.
In fact, they have one of the best balance sheets in the entire market. As of September 30th, they had nearly $2.7 billion in cash and short-term investments, with zero debt and only $548 million in total liabilities. Not many companies can say that they can pay their entire liability balance nearly 5 times over with cold, hard cash!
When it comes to their income statement, it’s clear that their revenue is going to be driven by the Rest of World segment I mentioned earlier. Even though the $24 million from that segment was only 3.5% of their revenue in Q3, it was up 36% year-over-year, far outpacing the rest of the company.
As far as expenses go, it’s obviously going to take some extra money to execute Pinterest’s new plan; in Q3, their operating expenses were up 40% year-over-year driven by heavy R&D spending. However, based on the advantage that I laid out above, I think the benefits from this will be worth a year or two of heightened expenses.
Lastly, their cash flows are also very solid. Through the first three quarters, they’ve brought in $476.9 million in free cash flow, which is on pace to be close to 2021’s total of $614.8 million. Clearly, Pinterest has no problem bringing in cash, which serves as fuel for their future plans.
Disclaimer: Everything presented on my Substack is based on my personal research and opinions, and it should never be taken as investment advice. Just because I say good things about a stock or crypto or any investment doesn’t mean it’ll go up (although I wish that were the case). Any action that you take after reading anything on my Substack is your own responsibility.
Great insights as always Ian. Happy Holidays!