In my earlier article on economic moat, I briefly touched on a social media company called Pinterest. Among the Prophet Relevance Index, Pinterest is the only social media company which is listed and that caught my eye. For the uninitiated, the Prophet Relevance Index highlights the list of companies which have the largest brand relevance (and in some sense an economic moat). Examples of companies listed in the list are Apple, Google etc. Hence, I was surprised that other social media companies such as Facebook, Twitter etc are not listed. Instead, it was Pinterest. Interestingly, Pinterest has only been listed since 2019 which might suggest that we are still in the early days of the growth of this stock. In this article, I would like to go deeper into analysing this company.
So, first of all? What is Pinterest?
Pinterest is a visual social network which allows you to share images, videos and other visual-related content by either posting/pinning them on your own board or others' board. Unlike other social networks such as Facebook, Twitter and Snapchat, Pinterest is heavily focused on the interests of a person. The primary glue connecting the various users on this social media platform is the user's interest, and many users use Pinterest to look for content relating to their interests or gather inspiration to start a new project. Hence, you could see that it's fundamentally very different from other social media platforms which focus primarily on your network instead of your interests. Also, Pinterest is primarily a visual platform as you could even do a visual search using a photo in your phone to look for similar images. This is rather different from most other platforms which tend to be more text focused.
Now, as a technology company in its initial growth phase, you might not be able to use traditional metrics to evaluate this company. (You might like to check out my other article on valuing a technology company). Hence, I would like to focus on a few key metrics relating to social media companies to evaluate Pinterest.
Firstly, Monthly Active Users (MAU). Monthly Active Users (MAU) has been a common metric used to understand how engaged/sticky a particular social media platform is. In the latest quarterly earnings, Pinterest reports it's Monthly Active Users to be 416 million. This represents a growth of more than 25% every quarter for over a year. More importantly, this figure of 416 millions exceeds that of Twitter or Snapchat. This means that you now actually have more active users on Pinterest than on Twitter or Snapchat. This is certainly an impressive result.
It's not enough that you have a high number of active users. What's probably more important is how do you monetise these engagements on the platform? There is no point having a huge number of users if you could not monetise the engagements at the end of the day. This is where you need to have the metric- Average Revenue Per User (APRU). Average Revenue Per User (APRU) allows you to better understand how much revenue you are generating from each user from your platform and hence give you a clear picture on how well the platform is monetising the engagements. Unfortunately, this is also where Pinterest has more room to grow.
The Average Revenue Per User (APRU) for Facebook is around $10. Twitter's APRU is around $6. Based on the last 4 quarters, Pinterest's APRU is around $3.50. This is still quite a distance from the figures for Facebook and Twitter. The current pandemic has also put a dent on its APRU as it just reports a decline of 21% for its APRU on a year to year basis in its latest earning reports. This inevitably cast doubts on whether Pinterest could successfully monetise its users' strong engagements on its platforms eventually.
This is where it gets a bit interesting. Pinterest has a clear roadmap on how it is going to monetise its platforms. In May, Pinterest announced a partnership with Shopify. Shopify merchants can now easily have their product catalog converted directly into Pins on Pinterest. This foray into social commerce provides another source of revenue besides ad spending. And this is likely a brilliant move as users on Pinterest have a much higher shopping intent than users on other social platforms. By providing seamless integration with Shopify, the sales conversion could look very promising. If this takes off, we should be seeing an acceleration in the growth of its APRU.
Pinterest seems to be gaining traction of late. Even the release of Apple iOS 14 leads to a new daily download record of Pinterest app on the App store simply because people are looking for ideas to customise their home screen. It's interesting to see how this social media company which pride itself as being the last positive corner on the internet could gradually influence us in our daily life.
I will be keeping this stock in my watchlist.
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