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Ideas and inspiration are the catalyst for almost all of life’s big events.

Whether it is planning a wedding, an epic family vacation, a long-dreamed-out kitchen remodel, or even something as simple as a new outfit, ideas are a critical first step towards making them a reality.

And there is no better place on all the internet to find new ideas then the company behind today’s Green Screen stock review: Pinterest (PINS).

Chances are you’ve used or at the very least heard of Pinterest - close to 100 million people in the U.S. use it every month. But how exactly does the company work? And - more importantly - are we looking at an attractive business to invest in, long-term? Let’s take a closer look at this intriguing operation.

How Pinterest Makes Money

Pinterest has been typecast as a "social network", but it is different than what that term usually implies. People use the platform - which is free - to search for ideas and, ultimately, make those ideas a reality in their own lives.

Content on Pinterest are referred to as "pins". Pins are added by users to save ideas that they may want to use or revisit for a personal project, event, etc. Pins are visual - images or videos - and usually link off-site to where they can be acted upon (e.g. purchased). Users then collect these pins into "boards" - groups of related pins. This is where the social aspect comes in. Boards can be (and usually are) shared with everyone so that anyone else out there looking for particular ideas can browse similar boards made by other users.

For example, say you are planning a European vacation, but don’t have any particulars yet. You could browse Pinterest and find interesting locations to visit, hotels to stay at, road routes to follow, etc. You would then "pin" anything you liked to a "board" you created called "European Vacation" or whatever. No doubt thousands of other users have similar boards you could look at for inspiration. Or, you could use Pinterest’s visual search tools to find similar results in a different country, for example.

The use cases for Pinterest are almost limitless, and that’s one of the platform’s strengths.

OK, that sounds great, you may say, but how exactly does this translate to revenue?

It’s pretty simple, actually. Remember, I said that anyone can create a "pin". Well, that includes companies paying Pinterest to highlight their products on it. Yep, a lot of pins are simply ads from paying customers. Like other search ad platforms, paying customers get their "pin ads" promoted to the top of certain searches, or added to topical boards with keywords or other matches. When users click through the pin ad, Pinterest collects a fee.

And… that’s really it! Essentially 100% of revenue comes from advertising fees in this manner. There are different kinds of ad formats and Pinterest has dabbled some in on-platform sales, but for the most part what I described is the firm’s revenue model in a nutshell.

Here is another strength of the platform. Users are actually *looking* for these ads! It is that rare example of a situation where ads work as content, instead of a distraction from the content. Additionally, Pinterest avoids a lot of the bad parts of other social ad-based networks. There is little to no political arguing, online bullying, fake account spamming, and other nonsense you see on Facebook, Twitter/X, Instagram, etc. It is a positive environment, one where brands can feel safe putting their products.

It also has very attractive user demographics for advertisers. 2/3rds of users are women, and women drive 70-80% of all consumer purchases. It also appeals to younger people, with over 40% of users under the age of 30. These are highly sought after groups entering their prime years of spending.

Revenue Growth and Recurrence

Pinterest has a good 3-year compound annual revenue growth rate of 22%. This is a bit misleading, though. After pandemic-driven 52% growth in 2021, Pinterest has logged back-to-back years of sub-10% growth.

Still, things are looking up. Revenue growth was 12% in Q4 of 2023, and 2024 outlook points to 13-15% growth - well above our floor of 10%. Active users, currently standing at 498 million, are growing at about 10%. I don’t see this rate accelerating a whole lot - this will never be a 3 billion monthly user business like Facebook. We should be happy with a high single digit growth number here.

The real key to continued growth for Pinterest is monetization, or increasing "average revenue per user" (ARPU). Global ARPU for 2023 was $6.44 - up only 1%. But it would seem there is room to improve this. Facebook ARPUs are over $44, Instagram earns $25 per user, Twitter/X does something similar, and even weaker competitors like Snapchat do $13 per user - more than twice Pinterest. Given Pinterest’s natural fit with ad content, it is a surprise the platform does not earn more than it does. It should be an opportunity.

This is especially obvious when you consider where most of Pinterest’s users are - overseas. 80% of its user base are outside of the U.S…. But U.S. ARPU at $25.52 far outstrips that of Europe ($3.73) and the rest of the world (a paltry $0.50/user). Users are growing a lot faster internationally, too. Non-U.S. users increased by 32% in 2023. Inside the home country, they were basically flat.

We would want to see Pinterest both increase its monetization of international customers AND start to kickstart its U.S. user growth to meet our 10% long-term growth rate.

As for recurring revenues, I generally consider large ad networks as recurring, as they fit the definition of a "toll booth" model (a little revenue for every ad served). Certainly, Pinterest is going to be more affected by economic swings than, say, a subscription business. But it is highly unlikely that revenue will ever get cut in half in any given year.

Moat

Like many social networks, I feel Pinterest benefits from a modest NETWORK EFFECT. We’ve mentioned how this is the rare network where users are actually LOOKING for things to buy, which is a huge benefit to the other side of the network (sellers). At 500 million monthly users, Pinterest is a large network, although much smaller than competitors like YouTube (2.5 billion), TikTok (2 billion) or Instagram (1.5).

Monetization again puts a bit of a hole in this moat assumption. It makes me question the true ability of the platform to drive sales through ad pins. Is this a failure of business development, a technical flaw in the platform, or are users just there to browse and not particularly motivated buyers? Regardless of the answer (which I imagine is a little of each), ARPU weakness certainly points to Pinterest having a narrow, or even non-existing, network effect competitive advantage.

Management and Financial Metrics

Pinterest was founded in 2009 by 3 men, Ben Silbermann, Evan Sharp, and Paul Sciarra. All 3 retain some level of involvement in the firm. Silbermann sat as CEO up until very recently, and today remains chairman of the board. He also maintains 33% of the voting power in the firm. Sharp also is on the board, although his ownership and voting stake (3.3%) is minimal. Sciarra has no involvement in company management, but maintains his massive economic and voting stake (33%, same as Silbermann).

The current management team is less seasoned. CEO Bill Ready took over just a few years ago. He previously held multiple "C" level officer positions with Google and PayPal (via its Braintree purchase, of which he was CEO). We don’t have a lot to go on, yet, but trends are starting to turn positive under Ready. Growth in both revenue and users is returning, and Pinterest’s free cash flow metrics have never been better (now nearing 20% margin).

Speaking of financial strength, I have zero concerns. The firm is debt-free and sports over $2.5 billion in cash on the balance sheet. Free cash flow has been positive since 2019 and has only gotten stronger in the years since. Free cash returns on invested capital are outstanding, nearly 79% in 2023. Pinterest is conservatively run, with an organic growth strategy, and it shows in the numbers.

Risks

This is a pure play on advertising. In an economic downturn, Pinterest is likely to suffer larger revenue declines than more diversified competitors. Digital ad inventory is almost limitless, and as a result pricing has been trending down for years (and will likely continue to do so). This will pressure long-term revenue growth potential and margins. Social media continues to birth new competitors that quickly scale every few years.

Growth is also a question mark for Pinterest. MAU growth is mediocre in the U.S. (just 1-2%), and ARPU lags far behind competitors, particularly outside of the U.S. There is certainly a path for Pinterest to deliver 10% (even 20%) annual growth over the next 5 years, but management will need to figure out why it has lagged its peers with user and dollar growth.

New management is a bit of a wild card. So far, they’ve continued Pinterest’s traditional conservative methods. But if we see a divergence from this, with big acquisitions or a lot of debt for no good reason, we may have to re-evaluate.

Conclusion

I’ll be honest here - I like Pinterest. I enjoy using the app, which is fun and stress-free. I love the positive nature of its usage patterns and the "everyone wins" nature of the advertiser-consumer dynamic. The fact that it appeals to a majority woman audience and younger users should be a HUGE boon to its economic potential.

The business is attractive enough, too. There is plenty of growth potential - digital ads is a $700 billion global market growing at 10% a year. Ad platforms are a "toll booth", recurring revenue model. There are reasonable network effects in play. The company is conservatively run.

The risks are clear. Pinterest has never lived up to growth expectations. The platform poorly converts users to revenue. The moat probably isn’t tremendous, considering the competitive landscape. Management’s future strategies are hard to predict.

On balance, though, I think Pinterest is worth an add into the Watch List. Using a 5-year annual growth rate of 11.2%, dilution of 2.7%, an 18% free cash margin, and an 11% rate of return, Pinterest looks worth $23/share. At $34, the shares are trading almost 50% above that at present. We will add the stock and await a better entry point, if indeed one comes.

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