Pinterest, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

Pinterest, Inc. operates as a visual search and discovery platform where users find ideas, create and share visual content. It generates revenue by connecting brands with users through visual search and recommendations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Pinterest’s business model revolves around creating visual inspiration for users by providing a platform for searching, organizing, and sharing images, videos, and products. It monetizes through advertising, creating a marketplace for brands to connect with users based on shared interests.

Business Overview

  • Revenue Distribution: Pinterest’s revenue is primarily generated from advertising, primarily through impression and click based ads on their platform. A smaller portion comes from other revenue streams that include subscriptions and partnerships. As of Q3 2024, U.S. and Canada accounted for the highest portion of total revenue, with 70%. Europe constitutes around 17% and Rest of World around 13%. The average revenue per user in the US and Canada, is significantly higher than its international counterparts.

  • Trends in the Industry:
    • The digital advertising industry is seeing continued growth, although impacted by macroeconomic uncertainties.
    • Users are increasingly seeking visually-rich experiences and authentic content, which plays to Pinterest’s strength.
    • The trend towards e-commerce and direct-to-consumer selling is a boon for Pinterest, as it offers a platform for product discovery.
    • Competition in digital advertising is intensifying, with major players like Meta and Google capturing a large share of the advertising market.
    • AI is an important developing theme in the industry with generative AI and data tracking improvements being a focus for companies.

  • Margins: Pinterest’s margins show considerable improvement in Q3 2024, with a significant improvement in their EBITDA margins. They’ve noted that, they are focused on growing the top-line while also controlling operating expenses and focusing on improving efficiency. They plan to continue these efficiency efforts going into 2025. They have mentioned that share-based compensation will continue to be a notable expense.

  • Competitive Landscape: The digital advertising market is dominated by tech giants like Meta (Facebook, Instagram) and Google, which offer extensive advertising platforms and reach. Pinterest competes with them by focusing on visual inspiration and targeted, interest-based advertising. Other competitors include newer social media platforms, as well as emerging channels like short-form video applications.

  • What Makes Pinterest Different:
    • Pinterest has a unique position in the market with its focus on visual discovery and inspiration, instead of direct social media engagement. This creates a specific target audience of users that are interested in finding, planning, and creating content.
    • Unlike other platforms where users might passively scroll, Pinterest is where users actively explore and are in a buying mindset. The majority of the traffic in Pinterest are for users exploring options to create something or are planning a project, and that is very valuable for advertisers.
    • They are expanding into more video content, and that also is an important growing area that attracts advertisers.

Financial Analysis

  • Revenue Growth: Pinterest has had uneven growth over the last few years with high growth during the pandemic as advertising revenue went into overdrive to reach consumers and subsequent slowing of ad spend after the pandemic. In 2023, they saw a decent revenue growth while cutting operating expenses. They have been improving on their revenue per user and also growing their user base in both the U.S. and in international markets. For Q3 2024 revenue was $763.2 million, up 11% YoY and a 12% increase in global monthly active users (MAUs).

  • Profitability: Despite the fluctuating revenue growth, profitability has been steadily improving over the past year. However, to continue to grow profitability, Pinterest must focus on higher revenue growth and maintain efficiency efforts to control expenses. Net loss for Q3 2024 was $66.8 million, while adjusted EBITDA was $242 million.

  • Cash Flow: Pinterest generates positive cash flow from operations and uses this cash for its strategic initiatives. This strong cash flow position, even as profitability is growing, indicates business resilience. Operating cash flow in Q3 2024 was $237 million, while capital expenditure was only $6 million, which makes for high free cash flow.

  • Capital Structure: Pinterest has a fairly good balance sheet with nearly $3 billion in cash, cash equivalents and marketable securities. They have no debt, and an asset base of nearly $5 billion and so the asset base looks like it is funded with all equity. They are currently aggressively repurchasing their shares from their $1 billion share repurchase program.

Moat Assessment

  • Moat Rating: 2/5

    • Intangible Assets: Pinterest benefits from brand recognition within its niche, which serves as a base for repeat business. This could be classified as an economic moat, if they are able to effectively use their brand to increase revenue and value. However, brand alone does not provide long lasting, defensible competitive advantage.

    • Network Effects: Pinterest benefits from the positive reinforcement cycle, that more users provide more content, which, in turn attracts more users to the platform. Network effect is a moderate strength, however, with fierce competition from other platforms like Meta and Google.
    • Switching Costs: There are not considerable switching costs for the users or advertisers on their platform, they can move and change their presence relatively easily.
    • Cost Advantages: There are no real cost advantages associated with this company, as they are fairly similar to competitors.

  • Justification: Pinterest has some competitive advantages stemming from its unique approach to visual inspiration and discovery, along with a decent brand. However, due to the intense competition, low-switching costs, and lack of defensible economic advantages, the moat is not very strong or wide-enough.

Legitimate Moat Risks and Business Resilience

  • Risks:
    • Intense Competition: The digital advertising market is intensely competitive. Competitors may offer superior platforms or pricing, taking business away from Pinterest.
    • Changing User Behavior: Changes in user behavior (ex. shift to other social media platforms or to short-form video) could make Pinterest lose relevancy among users. This will, in turn, affect ad revenue and ultimately hurt the company.
    • Algorithmic Changes: Changes in search algorithms in search engines can reduce the traffic to Pinterest from outside its platform. This would lead to decrease in new user adoption.
    • Privacy and Legal Regulations: Increased regulatory requirements and restrictions on data usage and targeted advertising could affect their business model and ad revenue potential.
    • Emerging technologies: New emerging technologies like AI and its integration into other areas can reduce the stickiness or advantages of Pinterest in the long term.
  • Business Resilience:
    • Pinterest’s positive cash flow provides them with financial flexibility to maneuver any challenges the business faces. The large cash reserves and no debt also gives a cushion against downturns.
    • Its user base, despite not having the highest growth, has remained relatively stable and that is important, as they have a consistent traffic flow.
    • Pinterest’s business is unique, so they can compete on differentiation, rather than pure costs and so are not as susceptible to competitors as some other companies.
    • Pinterest is still trying to improve their platform with things like integration of AI. If they can improve the platform or ad capabilities, they could increase user engagement and improve the company performance.

Understandability

  • Understandability: 2/5
  • Justification: Pinterest’s business model is quite different from some traditional internet businesses and might be difficult to understand for new investors. It is primarily an ad network that is targeted towards a niche part of the consumer market, where users are seeking inspiration for purchases or projects. However, understanding the mechanics of the advertising business is crucial, which can be difficult for new investors. Furthermore, understanding the technology and algorithms that drive user engagement and ad conversions require some in-depth knowledge.

Balance Sheet Health

  • Balance Sheet Health: 4/5
    • Cash and Liquidity: The company has a very strong cash position, and it is highly liquid.
    • Debt: They have no debt, which is always a good sign, and protects the company.
    • Shareholder Equity: Pinterest has a healthy shareholders equity and their assets far outweigh their liabilities.

  • Financial Flexibility: The strong cash balance and no debt creates significant flexibility for capital allocation and investment opportunities.

  • Justification: They have a very healthy balance sheet with no debt and abundant cash and securities. This provides them with the freedom to make strategic decisions and face macroeconomic downturns without much concern.

Recent Concerns / Controversies and Management Response

  • Concerns around slower growth: Analysts have been concerned with the user base growth in recent quarters. As mentioned earlier, Pinterest is no longer seeing exponential growth like they did earlier during the pandemic boom. Management is trying to address this with new features and focus on attracting more users and is also looking into growing international markets.

  • Concerns about AI and monetization: The company is currently undergoing significant investment into AI technologies, and their potential for positive or negative impact is still uncertain, and this creates a bit of uncertainty for investors. Management has indicated that monetization of the AI technologies will be very important for the company going forward.

  • Management Response: Management acknowledges the challenges but is focused on innovating and focusing on their strength of visual inspiration. They also emphasize that they are working to improve their relevance among advertisers by making the platform more effective and measurable for campaigns, and that is the main focus going forward. They are making efficiency measures to increase profit and are also investing for long term opportunities that will increase their revenue. They emphasize that their users are valuable and that they can continue to have a strong moat in their niche market.

The company has a decent, unique business but struggles with low barriers of entry. There is a lot of unknowns regarding the future of the company as well, especially with new technologies like AI coming into play. Pinterest will need to prove that they are able to create a defensible position in the niche of the market that they are in and improve profitability.