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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Word On The Street: The Most Popular Transcript Keywords Of 2018, By Sector (An Annual Report By Sentieo)

Every year, thousands of pages of earnings call transcripts are generated and analyzed by equity analysts for signals about how individual companies — and the market — will perform. Our 2018 Word On The Street report demonstrates how Sentieo’s Document Search and Transcript Sentiment tools make that data more accessible to researchers.

How It Works

We used Sentieo’s natural language processing technology to scrape all the earnings transcripts published in the last year. We then processed and cleaned the data to distinguish the keywords in the text. We highlighted the words in each transcript that occurred on the greatest weighted average basis. We also eliminated filler words (like “or”, “and”, etc.) and conducted analytics on the cleaned data, like part-of-speech tagging (picking out nouns and verbs for semantic analysis) and sentiment analysis (quantifying the tone of the text).

Natural language processing powers the Sentieo platform’s document search and transcript sentiment functionality, putting its users at the forefront of financial research technology.

The Most Popular Transcript Keywords Of 2018, By Sector

Our 2018 report spans all sectors – from consumer discretionary to utilities. Here’s a sample page of our report on the Consumer Staples sector. For the full, free report, please download it here.

We want to hear your thoughts on this report, or any of our other whitepapers! Your feedback is welcome at hello@sentieo.com. For a free trial of Sentieo or to learn more, get in touch here.

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Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches

This article was originally published in Forbes

Our third article on the Fed leverages third-party political trend data as well as powerful Sentieo opinion mining to break down past speeches from top contenders for the Fed Chair. We discuss possible 2018 scenarios and delve deeper into the surprising results we come across. Brush up on the previous articles and see what’s coming up next in our series using the FedSpeak lexicon here:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

From left, Gov. Jerome Powell, Former Vice Chairman Stanley Fischer, Federal Reserve General Counsel Scott Alvarez, and Federal Reserve Chair Janet Yellen, speak together following a Board of Governors meeting. (AP Photo/Andrew Harnik)

We set out to analyze the historical speeches of the top Fed candidates with Sentieo’s natural language processing capabilities and in the process, we learned something interesting. It doesn’t matter.

The Federal Reserve is not a one-woman organization and while the chair tends to drive policy, the minutes reveal that the entire committee weighs in on decisions. Some subtle changes over the course of this year have changed the makeup of the FOMC into a more hawkish committee. Furthermore, the composition of the FOMC will change when four of the regional bank presidents and voting members rotate out for their peers.

Earlier this year, Daniel Tarullo resigned. And just a little over a month ago, Stanley Fischer, a longtime central banker, resigned from Fed Board of Governors. In their place, Donald Trump has nominated Randal Quarles, a monetary hawk who favors a rule-based approach to monetary policy, as vice chair for bank supervision. Unfortunately, transcripts of Mr. Quarles views on monetary policy are not readily available, so he is not included in the quantitative analysis.

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Why Is The Fed Still Raising Rates? The Yellen Effect

This article was originally published in Forbes

Our second investigation of the Fed’s sentiment discusses the impact Chairwoman Yellen has had on the Federal Reserve since her rise to the Chair in 2014. We created and utilized our ‘FedSpeak’ lexicon to delve into the correlation between the Fed’s intentions and Yellen’s speeches before colleagues, Congress, and the press. Read the previous article and see what’s coming up next in our series here:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

Federal Reserve Board Chairwoman Janet Yellen speaks during a news conference following a meeting of the Federal Open Market Committee September 20, 2017 in Washington, DC. Yellen announced that the Fed will not change interest rates this quarter. This is one of the last meetings before Chair Janet Yellen’s four-year term ends in February.

The Federal Reserve conducts the nation’s monetary policy under a mandate from Congress to promote maximum employment, stable prices, and moderate long-term interest rates in the U.S. economy.

The Fed began its current round of rate hikes in 2015, and the Fed Funds target rate now stands at 1.25%, up from 0% two years ago.

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Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed

This article was originally published in Forbes

This piece kicks off our new series on the analysis of the Federal Reserve using Sentieo’s natural language processing power and flexible Doc Search technology. We will focus on bringing interesting ideas and surprising revelations derived from thousands of public federal reserve documents. Join us as we scrutinize meetings, congressional testimonies, and press conferences with some truly impressive technology; and see what’s coming up next in our series:

Sentiment Analysis Of FOMC Statements Reveals A More Hawkish Fed
Why Is The Fed Still Raising Rates? The Yellen Effect
Assessing Fed Chair Hopefuls With NLP Analysis Of Past Speeches
Predicting The FOMC Statement With Beige Book Sentiment Data

The Federal Reserve System’s Federal Open Market Committee (FOMC) meets eight times a year, at 2 p.m. Eastern Time in the basement of a nondescript, Washington, D.C. office building. The terse statements released after those meetings drive the direction of global financial markets and the meeting minutes are carefully scrutinized carefully by the media.

We parsed recent statements and minutes since 2012 using Sentieo’s natural language processing and sentiment analysis and found some interesting trends.

For the most recent statement 9/20, the strongest topic continued to be inflation, as highlighted in the unfiltered word cloud shown here.

The intensity was roughly equivalent to the prior statement, as the Fed continues to be vexed by an inflation shortfall versus expectations. Based on the statements alone, this analysis would suggest that Fed intentions have barely changed.  However, when we apply sentiment analysis to the words in the documents using the Loughran-McDonald context-specific lexicon, which assigns a simple positive or negative value to words based on the financial services industry context, the 9/20 statement occurs as much more hawkish.

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Amazon Competes With Everyone — And Wins

This article was originally posted on Forbes.

No other company has done a better job of attracting constant media attention than Amazon ($AMZN). With shares hovering around $1,000 per share, the retail-tech giant now stands as one of the four largest companies in the S&P 500 with a nearly $500 billion market cap. That represents a more than 50,000% return from the $1.73 IPO price two decades earlier. Investors fortunate enough to snatch up shares when it first hit the public market can comfortably call themselves millionaires.

While shares no longer look cheap by any traditional metric, money managers believe ongoing investments will result in even greater future returns. This is because Amazon has shown a remarkable ability to succeed in new spaces that it expands into. This is in many ways, the opposite of conventional wisdom. Large corporations often struggle when they stray outside of their core competencies. Amazon has been able to flip this script.

Amazon’s ability to accomplish this comes in large part from the leadership of its CEO, Jeff Bezos, who has consistently pushed the philosophy of, “Day One.” This excerpt from Amazon’s last letter to shareholders illustrates his commitment:

“Jeff, what does Day 2 look like?”That’s a question I just got at our most recent all-hands meeting. I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1, and when I moved buildings, I took the name with me. I spend time thinking about this topic.

Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades, but the final result would still come.I’m interested in the question, how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organization?

Such a question can’t have a simple answer. There will be many elements, multiple paths, and many traps. I don’t know the whole answer, but I may know bits of it. Here’s a starter pack of essentials for Day 1 defense: customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.”

Of course, the true measure of success for any public company and its philosophy is how its share price performs. As Amazon’s reach has broadened into new industries, the number of companies who need to mention Amazon as a competitor has broadened as well.

We used Sentieo’s advanced document search to construct a query that uncovers every mention of Amazon as a competitor in public company filings (10Ks, 10Qs, 8Ks, earnings calls, investor presentations, etc.) in the last 10 years. In the chart below, you can see that mentions of Amazon have grown considerably over the past 10 years while the stock price has also grown in lockstep.  

Mentions of “amazon competitors” in public filings and AMZN stock price (Source: Sentieo Document Search)

Drilling down into specific sectors, the same pattern shows itself. Take Air Freight and Logistics, a nascent segment of Amazon’s business, for example. It was only in 2016 that Amazon first made an announcement to lease 20-40 Boeing jets to augment their distribution capabilities. If we look at the mentions of Amazon in only Air Freight and Logistics company filings, we again see the number of mentions skyrocket. Read More

According To One Metric, This Could Be The Best Time For Stock-Picking In A Decade

This article was originally posted on Forbes.

The last three years have been dismal for fundamental long/short managers, and stock picking at large. However, at Sentieo, our analysis shows that we are currently in the best environment since before the 2008 crash for picking stocks. Now, that isn’t to say that this is the best time to buy stocks, nor is it a prediction of fund performance. But, according to an analysis of one metric, cross-correlation, the current market should provide an unusually ripe environment for stock picking.

First, a bit about what we mean by cross-correlation: The pairwise correlation between two stocks is a value between -1 and 1, that indicates how likely the two securities are to move in the same direction. Over a given time period, two stocks that perform identically will have a value of 1, two stocks have no correlation at all will have a value of 0, and two stocks that are perfectly inversely related will have a value of -1.

We ran the pairwise correlations between every stock in the S&P 500 and every other stock in the index (249,500 computations!) from the 2007-8 financial crisis until now. Averaging all of the correlations provides an indicator of how much stocks move in tandem with each other. If the cross-correlation is 1, there would be no opportunities for stock picking since all stocks would move in tandem with each other. The higher the value of the index, the more difficult it is to make money by selecting individual securities at that point in time.

The graph below shows the cross-correlation for the entire S&P 500 over the past decade. There are a few important takeaways from this chart. First, it is clear that the cross correlations of the S&P 500 are at decade lows. Second, we see a preponderance of large spikes in the data.

S&P 500 Cross-Asset Correlation
S&P 500 Cross-Correlation

As you can see, the spikes correspond with market shocks, the major macro events of the last decade. The jump in cross-correlation following a market shock is to be expected. When this sort of event happens, the entire market tends to turn in one direction as it collectively decides to buy or sell. The most recent inflection point, however, the 2016 election of Donald Trump in the United States, behaves differently.

The 2016 US Presidential election has driven correlations to new lows. Furthermore, correlations in the market actually began dropping prior to the November 8th election day, around the time when then-FBI Director James Comey sent a letter to Congress on October 28th. As opposed to the market shocks where the market all reacts in the same direction, it seems the collective market doesn’t know how to react to Donald Trump with any certainty. In other words, as of today, Donald Trump is an inherently uncertain entity that is creating opportunities for security selection.

Impact on Hedge-Fund Returns
As shown in the chart below, hedge fund monthly returns for long/short equity managers tend to react inversely to cross-correlation, as we would expect. This provides further validation to the idea that cross-correlation is a solid predictor of the overall environment for stock picking.

Monthly Returns of Long/Short Equity Funds
Monthly Returns of Long/Short Equity Funds

We can further apply cross-correlation to show the volatility of selected sub-sectors of the S&P 500. Doing so, we can demonstrate which specific sectors may have benefitted the most from the US election, again, purely from a stock-picking perspective.

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Sell In May Has Gone Away?

With the S&P up 7% year to date, is it time to sell in May and go away?

It’s an old Wall Street adage, and the data appear to bear it out.  Since 1950, the S&P has returned 3.4% on average for the year up to April, while returns from June to October have averaged only 0.9% over that time.

However, over the last five years, the dynamics of the monthly seasonal trade have not only changed but have become even more pronounced.

Summertime Has Been Producing Good Returns:

Beginning in 2012, January to April returns have averaged 4.9%, similar to the full series from 1950, but June to October returns have also averaged a healthy 3.95%.

Most notably, July has emerged as a very strong month, and June has turned from negative to positive.  Also of note, the seasonal weakness in September has pulled forward into August.

This analysis suggests that August, not May, is the real bogeyman for investors.

Volatility Has Been Spiking In August:

Another way to come to the same conclusion is to look at the average returns of the CBOE VIX index shown below.

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5 Canadian Companies With Unusually Large Buybacks

In Canada, a substantial issuer bid (SIB) is the formal term for a tender offer to repurchase shares. SIBs can be used to buy back an unusually large amount of shares beyond what’s allowed with a typical NCIB buyback program (Normal Course Issuer Bid). Tender offers may be a sign of improving corporate governance or savvy management taking advantage of their stock’s undervaluation. Or, large buybacks might simply be misleading demonstrations of confidence in a company’s prospects.

We’ve compiled a cheat sheet of Canadian stocks that are in the process of buying back a substantial portion of their float. We looked at the past 3 months of filings to find stocks that are:

  • In the process of a SIB
  • Have completed a SIB and continue to repurchase shares

The market capitalizations of the 5 stocks we’ve found range from C$133M to C$3,186M, so there should be a reasonable amount of liquidity for the largest stocks in this group. Without further ado, here’s our cheat sheet…

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Consumer-grade Apps Don’t Work For Equity Analysts

Our CEO, Alap Shah, wrote a guest article that appeared in HedgeWeek this morning on the topic of consumer-grade note-taking apps, and why they don’t work for equity analysts*.

Investment analysts, by and large, are a pretty smart group. If they can find a better way to do their job, they will. So it’s no surprise that an industry that relies so heavily on information has adopted a number of consumer-grade apps to enhance their workflow. And while better than nothing, this practice can create more problems than it tries to solve.

In the analyst community, note-taking apps such as Evernote and OneNote now often serve as the foundation for the research process, in spite of the fact that neither were designed with analysts in mind. Why are these solutions being adopted? First, they are mostly an improvement over the ubiquitous network and folder structure. Second, they are fairly cheap and easy to use. But perhaps most importantly, they bypass internal IT operations that would otherwise express security concerns with such apps. While these solutions do offer an improvement over a network and folder topography, many times they are more like putting square pegs in to a round hole – they might fit, but you’re going to have to smash them in there pretty hard.

On the surface, consumer note-taking applications appear to be a good fit to manage the enormous amount of information—broker research, news, internal notes, SEC filings, call transcripts, etc.—that forms the basis of the fundamental research process. However, there are a number of instances where these generic apps fall short, and, ultimately, inject more problems into the research process than they solve.

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