Visual discovery platform Pinterest (NYSE:PINS) started out life as public company on the right foot. The Pinterest IPO price? $19. The opening price? $23.75, up 25% from the list price. The price as of this writing? North of $24, up a few more percent from the sky high open price.
Broadly speaking, the Pinterest IPO is set to be a huge opening day success. But, those who follow IPOs know that opening day successes don’t always lead to long term successes. Sometimes, first day pops are all hype and no follow through. The hype fades, investors sell and the stock falls.
That isn’t the case with the Pinterest IPO. This stock is worth every ounce of hype it is receiving on opening day.
In the big picture, Pinterest is a long-term winner. This is a hyper-growth digital ad company that checks off every box a hyper-growth company should check off.
Robust user growth that isn’t slowing much? Check. Big revenue growth from a small base with plenty of room to run? Check. Small but increasing revenue market share in a secular growth market? Check. Big and climbing gross margins? Check. Big but rapidly falling opex rates? Check. Narrowing losses? Check. Visibility to huge profits within the next few years? Check.
In other words, Pinterest has what it takes to be a long term winner in the stock market. Meanwhile, the current valuation isn’t stretched considering the company’s long term growth potential.
Consequently, the Pinterest IPO is much more than just hype. It’s hype and follow through. PINS stock will ultimately head considerably higher from here in the long run.
Pinterest Is a Really Good Company
As a consumer, I’ve always had a somewhat favorable view on Pinterest. Its unique value prop as a visual discovery and curation platform in a world that is increasingly drawn to visual-first platforms and desperately in need of curation are super attractive. As an investor, after looking at the numbers in the S-1, I’m also convinced that this is a really good company with a ton of long term growth potential.
First, and foremost, let’s discuss why Pinterest has staying power in a crowded consumer-facing digital economy. Broadly speaking, digital search through Google or Bing has shortcomings. It’s not great for searching when you don’t know exactly what you’re looking for. It also isn’t great for contextualizing a search, or personalizing a search, or even dong much besides getting consumers to the end-point (a link).
Pinterest solves these pain points by turning search into visual discovery. They create a personalized feed of visual-first Pins which are curated through genres and categories, so as to personalize and contextualize a search while allowing for discovery in the absence of a distinct search.
Right now, Pinterest is the best in the world at doing this. So long as this remains true, network effects will keep Pinterest exceptionally relevant to the consumer.
Now, let’s dig into the numbers to see why this is a winning company. Consider all of the following:
- Pinterest is bigger than Twitter (NYSE:TWTR) in America. Pinterest reported over 80 million and growing monthly active users in the U.S. last quarter. Twitter’s monthly user base in the U.S. is under 70 million and falling.
- Pinterest is growing more quickly than Twitter and Facebook (NASDAQ:FB) internationally. Pinterest grew its international user base by 6% sequentially last quarter. Facebook’s international user growth was 2% quarter-over-quarter. It was negative over at Twitter.
- Pinterest is the fastest growing public digital ad company on the revenue front. Pinterest grew revenues by nearly 60% year-over-year last quarter. Snap (NYSE:SNAP) was at 36% growth. Facebook was at 30%. Twitter was 24%.
- Margins are really strong. Pinterest gross margins are near 70% and steadily improving. The opex rate is below 80% and rapidly falling. The operating loss rate is -10% and rapidly shrinking, too.
- Market share is tiny. At less than $1 billion in revenue in 2018, Pinterest controls a tiny part of the near $300 billion global digital ad market, but its share in that market is growing.
Fundamentals Imply Upside to a $15 Billion Valuation
In the big picture, there is fundamental runway for Pinterest stock to run towards a $15 billion valuation in 2019.
Here’s the math. Pinterest’s U.S. user base appears to be stalling out around 80 million. Maybe that gets to 90 million or 100 million over time. That would represent right around 40% of Facebook’s 250 million domestic user base. Thus, in the U.S., the rough translation is that around 40% of Facebook users see the need to also have a Pinterest account.
Will that happen internationally, too? Will 40% of international Facebook users see the need to also have a Pinterest account? Probably not. But, Pinterest’s international user base is already nearly 10% the size of Facebook’s international user base. At scale, that could easily run towards 15%, or higher.
If so, that should produce around 400 million international Pinterest users by 2025, assuming tepid growth in Facebook’s user base. In addition to 100 million users in the U.S., Pinterest could be looking at a global user base of roughly 500 million by 2025.
Quarterly average revenue per user exited 2018 just north of $1. That’s pretty low; and it’s without any meaningful international revenue. Over at Twitter, the quarterly ARPU rate is right around $2.50. Pinterest could get there by 2025, as they increase revenue opportunities and more aggressively monetize international users.
A $2.50 quarterly ARPU rate on 500 million users implies $5 billion in ad revenue by 2025. Gross margins will likely scale towards 80% by then, while the opex rate should fall towards or below 50%. That would produce operating profits of about $1.5 billion, or net profits of $1.2 billion after a 20% tax deduction.
Based on a growth average 20 forward multiple, that implies a 2024 valuation target of $24 billion. Discounted back by 10% per year, that equates to a fiscal 2019 valuation target of just under $15 billion.
Bottom Line on the Pinterest IPO
The Pinterest IPO had a lot of hype, and deservedly so. This company is a long term winner, supported by strong fundamental growth drivers. Pinterest stock will ultimately head meaningfully higher in a multi-year window.
As of this writing, Luke Lango was long PINS, TWTR, and FB.