Is buying Pinterest in 2019 like buying Facebook in 2012?

What is Pinterest?

Pinterest is a visual discovery and bookmarking tool. It has created a niche on its own: we see it alongside Twitter, Instagram, Snapchat and LinkedIn, in terms of having created a unique product with social aspects.

Pinterest allows users to collect and save images within categorized boards, similar to the way that Slack discussions are organized into topic-specific channels. (We reviewed the Slack IPO filing here).

Pinterest is considered “social” because it allows users to follow people or specific boards based on their interests, and this aspirational “pinning” is fun, easy, and sometimes addictive.

Pinterest is a unique advertising business: not only is there high intent (i.e. collecting ideas for a bathroom remodel), but its various ad types (i.e. carousel, ecommerce) are covertly placed within the rest of the pinned images. In addition to Pinterest’s ads being hard to avoid, the ads are routinely pinned by users, thus increasing their reach. (We haven’t found many other platforms where this occurs).

Pinterest is also expanding its ecommerce capabilities, including the discovery of products from photos taken by users.

In our view, Pinterest is a unique property in the early stages of monetization (esp. international), similar to where Facebook was after its IPO in 2012. Unlike Facebook, however, there are really no questions around the monetization potential. (Mobile was a big question for Facebook). We are very optimistic on Pinterest in the long term, in contrast to the large unknowns around AVs, as we discussed in our Uber and Lyft AV review).

 

Product Overview

Below is what the Pinterest homepage for the desktop application looks like for one of our team members. The content suggested for browsing is tailored to several existing boards. Also note the carousel ads from blue chip advertisers (Home Depot and Walmart).

Opening up a board (called Art Deco in this case), reveals the saved pins and invites the user to explore more content of the same kind algorithmically. Users can also search textually. We can also see that this board has 13 followers who will see any new content as it’s added.

Clicking on “More Ideas,” we see an invite to shop, follow similar boards, and an ad that we can pin to save in our board or click to visit.

Scrolling down, we see two more unobtrusive but highly relevant ads, fitting not just the theme but also the color scheme of the suggestions and the board.

Financial Review

After this brief product and navigation overview, let’s look at Pinterest’s post-IPO 424 (full document) and their Q1 results (10-Q here).

Pinterest IPOed about a month ago in April at $19 per share, then went up to $34 before easing into the mid-$20s after the Q1 results. (Interactive chart)

Notes from our read-through of Pinterest’s Form 424 filing:

Pinterest’s own business description is centered around inspiration and discovery.

Pinterest’s value proposition to advertisers in clear: 250 million MAUs and 80% of US moms.

 

Further, Pinterest hits consumers at different stages in the shopping journey:

 

Pinterest is naturally a high-intent environment that is a secular ad dollar share-taker:

 

The growth vectors that Pinterest is listing include:

  • on the consumer side, more shoppable products (similar to the recent Instagram ecommerce integrations)
  • more verticals (men can be pinners, too!)
  • more localized content
  • more commercial content to be “discovered”

On the advertiser side, the growth will come from better relevance, more ad products, and more native and third-party tools.

As we mentioned in our introduction, these are all currently existing monetization paths. Pinterest, in our view, has a very low technological risk.

Pinterest’s Risk Factors include a lot of the “usual” factors that we see in tech IPOs. We have highlighted the major ones, in our opinion:

Pinterest needs the network effects of people contributing and sharing content on the platform, it depends on search engine traffic, and there might be competition.

 

Further down in the document, we see examples of the dependence on search:

We also see the competition around visual and ecommerce:

In our view, external competition is really the main risk factor: Pinterest has the network effects and the visual search leadership, and digital advertising in its many forms was, is and will be a share-gainer regardless of the economic cycle.

We can see Facebook’s Instagram launching a competitor, similar to what happened with Stories and Snapchat. We do not see this succeeding easily. Pinterest is centered around topics (the way Slack channels or Twitter lists are), unlike the personality-driven Instagram product.

There is a bad precedent though: Snapchat was hit by Instagram’s launch of Stories: the company had to include this in its pre-IPO filing (below), and we saw its DAU growth dampen quickly, and flatline afterwards.  

Snapchat’s DAUs have been at 0% growth in the last two quarters, and is actually declining in North America and Europe.

 

And Snapchat’s stock never really recovered: it is down by about two-thirds from the post-IPO high and its NTM EV/Sales multiple (left axis) has compressed from over 26x to under 9x. (Interactive chart)

 

Back to Pinterest: the financials look great.

We see exactly what growth investors want to see: increasing revenues (2.5x over two years) AND narrowing losses (GAAP loss reduced by 2/3rds over the same period).

Pinterest’s operating metrics are also going in the right direction: we can see that US growth has naturally flatlined at around 82 million (this is already very well-penetrated), but international is 2x larger already, and growing very well.

 

Unlike the user metrics, revenue metrics are very heavily skewed to the US: this is where the largest opportunity lies with Pinterest. There is practically zero international revenue, and dominant US platforms have demonstrated, time and again, that international user monetization is very doable.

 

The picture is really stunning at the ARPU level: the US monetized at $1.59 to $3.16 per quarter in 2018, while international users monetized at $0.05 to $0.09 per quarter. International monetization is lower in Pinterest’s comps like Facebook and Twitter as well, but it is not non-existent like we see below.

 

Perhaps you saw the seasonal spikes in the charts above for US users: Pinterest’s quarterly metrics reveal that the company was actually profitable, on a GAAP basis no less, in both Q4 2017 and Q4 2018. This confirmed our initial feeling that Pinterest is very close to profitability.

 

Pinterest is led by its founder, and its management team has prior experience around “Big Tech.” The founder and several employees came from Google, Square, HP, and Microsoft. This is the type of professional background that we like to see.

 

The Board consists of venture capitalists, predictably, as well as people with online media backgrounds.

The governance is similar to that of other tech IPOs (ie. dual class shares). The pre-IPO shareholder composition is also typical of recent high-profile tech IPOs: founders, management and VCs.

 

Like we noted in our Slack post, companies are waiting for longer before IPOing: this results in multiple rounds of private financing (here up to Series H).  

 

Since Pinterest reported results recently, we also took a look at their Q1.

First, we saw that everything is going according to plan: more international markets are being monetized, and more features are being added to gain share with ad clients.

 

The financials also looked great: 54% revenue growth and 22% MAU growth, driven by 29% international MAU growth. MAU growth has been fairly steady in the last 4 quarters: 25%. 23%, 23%, 22%.

 

ARPU is also growing rapidly, both domestically and internationally:

 

Losses also improved as a percent of revenue:

 

However, the stock dropped as media reports indicated that the guidance for 2019 was light (along with the usual “how can they bomb their first quarter?”):

 

 

We are much more optimistic on the business in the intermediate and longer-term.

This slide below caught our eye in the earnings release deck. On a running four-quarter basis, Pinterest is monetizing in the low $3’s globally, and literally in the pennies for the international segment.

 

 

This really reminded us of another great advertising business that you might have head of: Facebook. In this 2012 deck, we can see that pre-IPO, in 2010, Facebook had similar US monetization numbers.

 

Facebook is now running US monetization at 10x — roughly the ARPUs from back then.

We see something similar with Twitter, but in 2016 (around the same number of MAUs- though this is not a great metric for Twitter and the company recently switched to mDAU, monetizable DAU). US ARPUs are also similar to what Pinterest is running now. Twitter’s US ARPU is now 3-4x these 2016 amounts.

 

We can see Pinterest monetizing at levels above Twitter — due to the high level of intent — and lower than Facebook, as Facebook has two large monetizable properties.

We can see that Pinterest is currently trading at around 15x EV/Sales on an NTM basis:

 

Facebook also spent a lot of time trading in the low teens on a EV/Sales basis:

 

What is different here is that, unlike Facebook’s “early years,” we know for a fact that mobile is monetizable, and we know that video is monetizable, so the business risks are much lower. It really is heavily about the management team executing and following the path that has already been established by others in the space.

We see a similar picture when we combine EV/NTM Sales for LinkedIn, Facebook, Twitter, Snapchat and Pinterest on the same scale: high multiples are not unusual in the early years. (Interactive chart link)

 

 

This is even more clear when we align the origins (trading start) for the EV/Sales chart above. (Interactive chart link)

 

Completely speculatively, we can see Facebook acquiring Pinterest: we have no special knowledge and we would guess that Facebook must have looked at doing this prior to the IPO.

But we know that Facebook is a very smart acquiror (Whatsapp and Instagram being Hall of Fame acquisitions), so it is entirely possible that Facebook (or Amazon) will step in if Pinterest starts gaining more traction. This is a similar situation to LinkedIn: it became the de-facto depository for global, white collar professional information, and it was acquired by Microsoft after a short stint as a public company. We also think that Twitter will be an acquisition target if the business continues its “Disney-fication”, a process we discussed when we listed it as one of our top 11 long ideas in January 2019.

To summarize our view, we see Pinterest as a unique advertising and potentially ecommerce property that has established a very attractive vertical, and is only now turning on the monetization “machine.” Valuation is not dissimilar to what we saw in early Facebook, but with substantially lower business risks: we know what works.

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How to Use Sentieo Plotter to Visualize Both Financial and Non-Financial Metrics To Gain Insights Quickly

Plotter is one of the main modules of the Sentieo integrated research platform. Here are some of Plotter’s benefits:

  • Customizable visualization of financials and non-financial data (such as web traffic, sentiment, document search counts, FRED macro series)
  • Statistical overlays — such as means, moving averages, standard deviations and correlations — in 3 or less clicks
  • Relationship creation between series, such as market-cap weighted P/Es
  • The ability to upload one’s own datasets, as well as download any dataset
  • The ability to save and share one’s work using a public viewer link, internal messaging, and email
  • The ability to add charts to a note or to a formatted thesis write-up

Below, we will demonstrate a few uses for this very versatile tool.

Here is a simple combination of financial, valuation and non-financial data. As you probably know, Sentieo has NLP-based sentiment analysis for quarterly transcripts as a standard feature. This sentiment analysis can be accessed not just inside the transcripts themselves, but also in our Plotter and in our Screener.

Below we have plotted management sentiment from the Stamps.com quarterly calls, against the stock price and a rolling next twelve months price-to-earnings ratio (NTM PE). We can see that the sentiment decline preceded the drop in the stock price and the contraction in valuation. Interactive chart: http://snt.io/A8F2E6Hqk

In this chart, we have created a custom web traffic “market share” for Align Technologies (parent of the Invisalign orthodontic product). We combined the web traffic data for the three players in the industry, and calculated the share for ALGN. We also added the ALGN stock price. In order to align the traffic to the stock price, we did a one-quarter offset, and we can see that the two charts align (no pun intended) fairly well. Since getting braces is a large ticket purchase with a lot of research involved, web traffic has been a good proxy for this stock’s price moves. Interactive chart: http://snt.io/99F2E7WY1

Sentieo Plotter’s integration of several alternative data sources make it possible to follow social media and search trends for any topic. This is particularly useful for single-brand companies or entertainment titles. On this popular chart, we have plotted Twitter mentions of Game of Thrones, along with search trends for the topic, AND search trends for HBO. We can easily observe two things: interest in the series has been steadily increasing over the years, with the current season being extremely strong. We can also see that search trends for the “parent” HBO (in fuchsia) are very closely aligned with those of the show. Interactive chart: http://snt.io/KqF2E7oe4

Plotter can also be used to visualize the relationships between macro trends and an individual firm’s performance. In this chart, we show three very different datasets to move from “the macro” to “the micro.” The red line represents the U3 unemployment rate from our FRED Macro integration. The green bars depict monthly counts of restaurant transcripts that mention wage inflation (with synonyms)— just  a one-click export from our Document Search. Finally, we overlaid a four-quarter moving average of The Cheesecake Factory (CAKE) LTM EBIT margin (blue dotted line). We can immediately connect the dots: labor expenses ramp up very quickly once the unemployment rate hits about 5.5%, and the margin declines follow very quickly.   

Interactive chart: http://snt.io/5HF2E7xpH

Here we have used the built-in calculations capability twice. You can see all the hidden data sets by clicking on and off the eye icon or the legend at the bottom. First, we pulled in the NTM P/Es and market caps for CVS and Walgreens Boots (WBA), along with the NTM PE for the S&P 500 index. We then constructed a market-cap weighted NTM PE average for our two-member drugstore index. We then divided the S&P 500 NTM PE by that index PE to see how the industry valuation has moved against the overall market. Finally, we added the 10-year mean and 3-standard deviation bands (both with a single check box). We observe that our custom sector’s valuation has really contracted against the overall market. Is this an opportunity?

Interactive chart: http://snt.io/7JF2E8fBk

Sentieo’s Mosaic alternative data composite index can also be used in Plotter. We can see major and relentless deceleration in the alternative data composite index (the dashed line, 91-day MA) well before the APRN IPO, and the disappointing revenue (green) and stock price performance (red) since. Interactive chart: http://snt.io/3GF2E9Vgb

Finally, Sentieo Plotter can be used for visualizing data extracted from tables in SEC filings with our unique, ML-based Table Explorer tool. Below we have chained the reported income statement for CAKE in one click from 8-K filings. Note both the mini-Plotter preview for any line item, as well as the export to Plotter button in the upper right.

The Table Explorer chains not just tables with financials: it can be used for chaining any tables, such as ones with reported KPIs. For example, below we have pulled Chipotle’s comparable restaurant sales from the earnings 8-K to Table Explorer in one click, and then exported them to Plotter in two clicks (row selection and export), where we can combine them with many other metrics.

 

The export to Plotter looks like this. This dataset can then be saved for future use (such as for comparisons with another company’s KPIs or statistical operations). Interactive chart: http://snt.io/DGF2GH3eQ

Plotter is just one of the modules in Sentieo’s integrated platform. To learn more, please get in touch or watch our webinar!

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Slack’s S-1: Our Read-Through and Analysis

Sentieo was an early adopter of Slack. As a global company with 170 employees across several offices and time zones, we immediately saw the value of Slack “channels,” or topic-centric communication venues that are a place for instant internal discussions, updates, file-sharing, and even new employee onboarding (see our current openings).

Naturally, we were very intrigued by the Slack S-1 filing (see here). Below are the Sentieo-powered annotations we made as we read through the document.

The company explains what it does in two areas: Slack is where “work happens,” but it also replaces work email.

We also noted the tried-and-true “freemium” business model; the company has both free and paid plans. Slack has over 600,000 customers, 88,000 of which pay for the software. The typical user spends nine hours connected to Slack and over 90 minutes being active on the platform:

We completely agree with the benefits they list below, because we’ve seen the results in our own organization: increased engagement, valuable integration, better communication, and a running archive.

We are not alone in our Slack fandom: 87% of surveyed users agreed with us.

As for market positioning, while Slack lists several factors that help the business, we think that the focus, early lead, network effects, and switching costs (in our words) are key.

Slack’s growth strategy seems like “Business 101” — more customers, more business from existing customers, and more integrations (which make the product stickier).

Just like us, Slack is investing heavily in AI/machine learning, search, and other advanced technologies to improve workflows.

Revenue and revenue growth are absolutely spectacular. Slack went from an already sizable base of $105 mm in FYE Jan 2017 to over $400 mm in FYE Jan 2019. While the revenue quadrupling in two years is impressive, we also see gross profit going up 4x, and losses at the EBIT level flatlined over this time period. This indicates that Slack is scaling very well (in contrast to other recent S-1 filers and IPOs where losses have been growing with revenues).

Slack’s operating metrics are also going in the correct direction: paid users growing, large paid users growing, and net dollar retention comfortably over 100% (meaning that Slack is growing its revenue from retained accounts).

Related to this, the company provides a great annual cohort graphic.

The quarterly metrics reveal absolutely no seasonality in revenues. It’s growth, growth, growth!

Slack S-1
Slack S-1

Slack does both custom and standard third-party integrations with other tools. This, in our view and experience, is critical to Slack’s “centrality” within a business.

Slack S-1

Slack lists personnel as a Risk Factor:

Slack S-1

Slack’s corporate governance disclosures show a structure similar to other recent tech IPOs: supervoting stock, staggered board, and others.

Slack S-1

Analysts doing the work on the offering need to consider the disclosure that the offering would have been an equity award trigger event (page 90) and the subsequent events on page F-37. (Yes, we did read the whole filing).

Slack S-1
Slack S-1

Since the company is doing a direct listing (like Google did) vs. a traditional underwritten IPO, AND there has been a secondary private market in the shares for years, we appreciate that the company included pricing and volume data.

Slack S-1

The company has over $600 mn in cash/bonds, and went as far as a Series H-1 in funding, raising almost $1.4 bn.

Slack S-1
Slack S-1

Current shareholders table:

Slack S-1

One final interesting tidbit: due to Board affiliation, payment processor Square Inc. is considered a Related Party. Square is paying Slack $230,400 for the current year.

Searching Square’s 10-K Business Description section (for Sentieo users: in:10k:BSN employees), we see that Square has 3,349 employees but also uses contractors. To ball-park the number, this indicates a price of $69/employee/year (about 50% off from the $150/year/employee for the more expensive Plus plan listed on the Slack website currently).

If you are interested in learning how Sentieo can make you more productive, please get in touch with us.

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5 Big Takeaways Regarding Autonomous Vehicles from LYFT and UBER’s IPO Filings

With the Lyft IPO already behind us and the Uber IPO coming up, we took at look at what both companies are saying regarding autonomous vehicles (AV) in their filings with the SEC. While the AV space is undeniably exciting, we like reading the actual filings since the statements there are heavily reviewed. We read through UBER’s most recent S-1/A and LYFT’s post-IPO 424.

Here are our five main takeaways, in the companies’ own words:

1) Autonomous vehicles are just a few years away, and both companies are investing heavily:

 

“We believe that autonomous vehicles will be an important part of our offerings over the long term, and in 2018, we incurred $457 million of research and development expenses for our ATG and Other Technology Programs initiatives.”

ATG was established in 2015 in Pittsburgh with 40 researchers from Carnegie Robotics and Carnegie Mellon University. ATG has primary engineering offices in Pittsburgh, San Francisco, and Toronto with over 1,000 employees. ATG has built over 250 self-driving vehicles, collected data from millions of autonomous vehicle testing miles, and completed tens of thousands of passenger trips.”

“ATG focuses on developing autonomous vehicle technologies, which we believe have the long-term potential to provide safer and more efficient rides and deliveries to consumers, as well as lower prices.”  (Uber S-1/A)

 

We are investing in autonomous vehicle technology, which we believe will be a critical part of the future of transportation. Our strategy is always to be at the forefront of transportation innovation, and we believe these investments will continue to position us as a leader in TaaS.”

“We will also continue to make significant investments in autonomous vehicle technology, such as our Open Platform and Level 5 Engineering Center, to achieve our vision of integrating autonomous vehicle technology into our platform to complement drivers on our platform and increase availability.”

“We are investing in autonomous technology and employ a two-pronged strategy to bring autonomous vehicles to market. Our Open Platform provides market-leading developers of autonomous vehicle technology access to our network to enable their vehicles to fulfill rides on our platform. Simultaneously, we are building our own world-class autonomous vehicle system at our Level 5 Engineering Center, with the goal of ensuring access to affordable and reliable autonomous technology. We believe that the strength of our brand, our trusted relationships with riders and our expertise in operating a ridesharing network at scale, as well as our two-pronged strategy to bring autonomous vehicles to market, will be competitive advantages that will enable us to capture value in the emerging autonomous vehicle ecosystem.”

“Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform.” (Lyft post-IPO 424.)

 

2) The autonomous vehicle “winners” are unclear (UBER/LYFT vs. legacy car makers vs. new entrants).

Interestingly, UBER does not mention LYFT as an AV competitor but LYFT does mention UBER.

 

We also compete with OEMs and other technology companies in the development of autonomous vehicle technologies and the deployment of autonomous vehicles, including Waymo, Cruise Automation, Tesla, Apple, Zoox, Aptiv, May Mobility, Pronto.ai, Aurora, and Nuro, whose offerings may prove more effective than our autonomous vehicle technologies. Waymo has already introduced a commercialized ridehailing fleet of autonomous vehicles, and it is possible that our other competitors could introduce autonomous vehicle offerings earlier than we will.” (Uber S-1/A)

 

“There are also a number of companies developing autonomous vehicle technology that may compete with us in the future, including Alphabet (Waymo), Apple, Baidu, Uber and Zoox as well as many other technology companies and automobile manufacturers and suppliers.” (Lyft post-IPO 424.)

 

3) There won’t be an autonomous vehicles “cliff.” Humans and AVs will coexist on the road (a “hybrid autonomy”), but the transition might not be smooth:

 

Along the way to a potential future autonomous vehicle world, we believe that there will be a long period of hybrid autonomy, in which autonomous vehicles will be deployed gradually against specific use cases while Drivers continue to serve most consumer demand. As we solve specific autonomous use cases, we will deploy autonomous vehicles against them. Such situations may include trips along a standard, well-mapped route in a predictable environment in good weather. In other situations, such as those that involve substantial traffic, complex routes, or unusual weather conditions, we will continue to rely on Drivers. Moreover, high-demand events, such as concerts or sporting events, will likely exceed the capacity of a highly utilized, fully autonomous vehicle fleet and require the dynamic addition of Drivers to the network in real time”

“Further, we are investing in our autonomous vehicle strategy, which may add to Driver dissatisfaction over time, as it may reduce the need for Drivers.” (Uber S-1/A)

 

Our ridesharing network is positioned to facilitate the gradual introduction of autonomous vehicles on select, defined routes to complement human drivers. We have set ambitious goals for Lyft to broadly deploy autonomous vehicle technology. In the next five years, our goal is to deploy an autonomous vehicle network that is capable of delivering a portion of rides on the Lyft platform. Within 10 years, our goal is to have deployed a low-cost, scaled autonomous vehicle network that is capable of delivering a majority of the rides on the Lyft platform. And, within 15 years, we aim to deploy autonomous vehicles that are purpose-built for a broad range of ridesharing and transportation scenarios, including short- and long-haul travel, shared commute and other transportation services.” (Lyft post-IPO 424.)

 

4) The legal framework around autonomous vehicles is unclear:

 

We expect that governments will develop regulations that are specifically designed to apply to autonomous vehicles. These regulations could include requirements that significantly delay or narrowly limit the commercialization of autonomous vehicles, limit the number of autonomous vehicles that we can manufacture or use on our platform, or impose significant liabilities on manufacturers or operators of autonomous vehicles or developers of autonomous vehicle technologies.”

“Failures of our autonomous vehicle technologies or additional crashes involving autonomous vehicles using our technology would generate substantial liability for us, create additional negative publicity about us, or result in regulatory scrutiny, all of which would have an adverse effect on our reputation, brand, business, prospects, and operating results.” (Uber S-1/A)

 

There are a number of existing laws, regulations and standards that may apply to autonomous vehicle technology, including vehicle standards that were not originally intended to apply to vehicles that may not have a human driver. Such regulations continue to rapidly evolve, which may increase the likelihood of complex, conflicting or otherwise inconsistent regulations, which may delay our ability to bring autonomous vehicle technology to market or significantly increase the compliance costs associated with this business strategy.” (Lyft post-IPO 424.)

 

5) Publicity risks around AVs are real and they produce real setbacks.

 

“Autonomous vehicle technologies involve significant risks and liabilities. We have conducted real-world testing of our autonomous vehicles, involving a trained driver in the driver’s seat monitoring operations while the vehicle is in autonomous mode. In March 2018, one of these test vehicles struck and killed a pedestrian in Tempe, Arizona. Following that incident, we voluntarily suspended real-world testing of our autonomous vehicles for several months in all markets where we were conducting real-world testing, which was a setback for our autonomous vehicle technology efforts.” (Uber S-1/A)

 

“Accidents, defects or other negative incidents involving autonomous vehicles on our platform.”

Public perception regarding the safety of autonomous vehicles for drivers, riders, pedestrians and other vehicles on the road.” (Lyft post-IPO 424.)

 

Sentieo Document Search

We collected the information above using Sentieo’s synonym/acronym search capability, after which we used Sentieo’s highlighting and tagging function to send our notes directly into our integrated Notebook for review.

To see for yourself how Sentieo can make you more productive, please get in touch.

 

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