Deep Dive: Pinterest

Pinterest, the online product and idea discovery platform, reported its highest revenue ever in Q4 2021, netting US$2.58 billion in 2021, up 52% on a YoY basis and turning a GAAP profit for the first time since its inception. But not everything is hunky-dory as global monthly active users (MAUs) decreased 6% YoY to 431 million. So, what are the risks Pinterest faces? Will its pivot to social commerce help it succeed? What are the key insights from Pinterest’s financial statements? 

Let’s dive into the fourth edition of Deep Dive to answer these questions and more.

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Social Distancing

Founded in 2010 by Ben Silbermann, Paul Sciarra, and Evan Sharp, Pinterest is the go-to destination for gathering ideas on everything from recipes to DIY projects to home decor ideas. The site has tried to distance itself from other social media websites, wanting users to think of it as a “place for inspiration” rather than as a social network. The move is understandable given that its peers such as Facebook, Instagram, Twitter and YouTube have repeatedly come under fire for their inability to moderate content on their platforms. Pinterest is markedly different from other social media websites in more ways than one: 

1. Pinterest has claimed that a majority of its more than 400 million monthly active users are women. This is especially true in the US, where a major chunk of its users (called Pinners) are women aged 18-64. 
2. The idea discovery platform is also one of the more reliable and trustworthy websites, quashing vaccine misinformation, banning political and weight-loss ads, developing an inclusive beauty search functionality and launching compassionate search for Pinners seeking mental health support. Pinterest has also been at the forefront of combating climate change denial by banning misinformation about climate change from its platform. The ban applies to both advertising and user-generated content. 
3. Pinterest is also one of the few places where people want to be served with ads. Usually, Pinners scour the website for inspiration on home décor, travel, recipes, etc., meaning that they’re actively looking for products and services to buy. In essence, relevant ads don’t compete with native content on Pinterest; instead, they are content. 
4. Pinners often tend to be early in their journey toward a purchase and are open to discovering new brands on Pinterest rather than merely navigating to brands they’re already familiar with.

Social Commerce

Social commerce is one of the latest trends sweeping social media platforms. According to eMarketer, retail social commerce sales totalled US$27 billion last year and are projected to hit US$80 billion by 2025. Close to 48% of US social media users reported making a purchase via social media between 2020 and 2021, according to eMarketer’s US Digital Trust Survey 2021. 

Given the potential of this burgeoning industry, major social media websites have all started introducing their own features to induce customers to purchase on their platforms. Currently, Facebook is winning the social commerce battle, with around a third of adult social media users making a purchase there, followed by Instagram and YouTube. Other players such as TikTok, Snapchat and Pinterest have also started developing their own social commerce tools but don’t yet have a wide range of offerings compared with Facebook or Instagram. 

With Pinterest’s social commerce buyers said to increase from 14 million in 2021 to 17 million by 2025, the site has introduced a slew of social commerce and allied features: 

• Pinterest TV: Launched in Jun 2021, Pinterest TV is filled with breezy, instructional, and upbeat 30-minute episodes where creators post shoppable videos guiding their followers through exquisite recipes and beauty routines. The feature is not unique to Pinterest and is largely a catch-up exercise, given that Facebook Watch debuted in 2017 and IGTV launched a year after that. 
• Watch Tab: The Watch tab is Pinterest’s attempt at competing with TikTok; Pinners can scroll through creator videos and like, comment, and, most importantly, save to their Pinterest boards.
• Try On for Home Décor: The feature allows Pinners to see furniture from stores like Crate & Barrel, CB2, Walmart, West Elm, and Wayfair in their home with the power of augmented reality (AR). Pinners can use the in-app Lens camera to try out over 80,000 pieces of furniture from shoppable Pins. 
• Other features: Other features include a separate in-app Shop tab and virtual storefronts, but native checkouts are still unavailable.

Financials

Key Highlights

• MAU: Pinterest has recorded negative growth in MAU for the past three quarters. In the latest quarter, 2021 Q4, global MAU fell by 3% QoQ to 431 million. In 2018 Q4, the US users made up 31% of total MAU but have since fallen to 20% in the latest quarter. 
• ARPU: Average revenue per user has climbed up to US$1.93, rising 82% since 2018 Q4. The figure fell to its lowest level of US$0.7 in 2020 Q2. 
• Revenue: Revenue growth has been quite volatile, ranging from a negative 26% in 2019 Q1 to a positive 34% in 2021 Q4. Revenue from outside the US now makes up 23% of the total and has been growing at an average rate of 29% QoQ between 2019 Q1 and 2021 Q4. 
• Expenses: Measured as a percentage of total revenue, R&D continues to be the largest component in the past three years, followed by sales and marketing. Currently, R&D makes up 30% of revenue while sales and marketing constitute 25% of the same.

Revenue: Pinterest generates revenue primarily from delivering ads on its website and mobile application. Ads are divided into brand and performance ads. Brand ads are those that are optimised around an advertiser’s brand objectives, like impressions or video views. Performance ads are optimised around performance objectives like clicks or conversion events. As of December 31^st, 2021, performance ads represented close to two-thirds of its annual revenue. From video ads to idea ads to carousel ads, Pinterest offers a range of ad formats for advertisers to choose from. 

Cost of Revenue: Cost of revenue is primarily composed of expenses relating to the cost of hosting the website and mobile application. It also includes personnel-related expenses, credit card and other transaction processing fees and payments associated with partner arrangements. Cost of revenue increased by 18% YoY in 2021, driven by higher absolute hosting costs due to user growth.

Research and Development: R&D primarily consists of personnel-related expenses. In 2021, R&D expenses grew by 29% YoY, driven by an increase in share-based compensation expenses. 

Sales and marketing: Sales and marketing expenses are primarily composed of personnel-related expenses. In 2021, sales and marketing expenses grew by 45% due to a US$86 million increase in marketing expenses and a 26% increase in average headcount. 

General and administrative: General and administrative expenses are primarily composed of personnel-related expenses. The year saw an 11% decrease in general and administrative expenses due to a one-time payment of US$89.5 million for the termination of a future lease contract in Aug 2020 and a US$13.3 million decrease in share-based compensation.

Acquisition: On December 3^rd, 2021, Pinterest acquired Vochi, a video creation and editing app. The total purchase consideration was US$45.9 million in cash, of which US$14.8 million or 32% was attributed to developed technology and other related intangible assets, while the remaining was attributed to goodwill. 

Key Ratios

• Gross margin and operating margin, which are both profitability ratios, have improved YoY. Compared to the software (Entertainment) industry, Pinterest’s gross margin is significantly above the industry average of 64.45%, but its operating margin falls short of the 31.12% achieved by the industry, implying that it has to optimise its operations further to drive down its costs. 
• Days sales receivable is the average number of days it takes for the company’s customers to pay their bills. If the collection period is too high, it might mean that customers are slow in paying their bills, which results in a lot of money being tied up in the assets. While the collection period has dropped by 24% YoY, it’s more than double the industry average of 45.63.    
• Diluted earnings per share represent the net income available to common stockholders if all the securities that can be converted to common stock are converted. Diluted EPS has increased by more than 300%. 
• Operating cash yield is calculated as the difference between the operating cash flow and net income, divided by net income. It measures earnings quality. The ratio has improved YoY. 
• Cash to income, which is calculated as operating cash flow divided by operating income measures the ability to generate cash from company operations. The ratio has increased by more than 1200%.

DuPont Analysis

DuPont analysis is an approach to decompose return on equity (ROE) to understand the impact of net margin, total asset turnover and financial leverage on shareholder returns. ROE has significantly improved, but what is the underlying reason for the improvement?

• Total asset turnover indicates the effectiveness of the company’s use of its assets to generate revenue. The ratio has moderately improved YoY and is higher than the industry average of 0.64. 
• Net margin or net profit margin, which measures the profitability of the business, has drastically improved. The ratio is less than the industry average of 29%. 
• The financial leverage ratio, also known as the equity multiplier, is an indicator of the company’s use of debt financing. The ratio has remained constant. 

So the improvement in ROE has been primarily driven by the increase in net margin and partly by the increase in total asset turnover. Pinterest’s ROE is substantially less than the industry average of 26%.

Risks

Competition: Pinterest faces stiff competition from established consumer internet companies such as Facebook, Amazon, Google, Snap, Twitter and TikTok. Emerging competitors include Tastemade, Allrecipes and Houzz. 

Profitability: The platform is still in the early stages of monetization and has an accumulated deficit of around US$2 billion. Pinterest may not be able to maintain profitability as it anticipates a significant increase in operating expenses as it looks to expand operations and enhance its product offerings. 

Users: Pinterest’s MAU peaked in 2021 Q1 and has fallen ever since. Growth in international users has been in the red for the past three quarters, while the number of US users has been stagnating since 2020 Q4. 

Ads: Pinterest generates a substantial portion of its revenues from ads, and most advertisers do not have long-term advertising commitments with it. Also, the advertisers spend only a relatively small portion of their overall advertising budget on the platform. Most of Pinterest’s advertisers belong to the consumer packaged goods (CPG) and retail industry. 

Conclusion

Pinterest’s pivot to social commerce is a step in the right direction, but it has to quickly scale up its offering and provide better monetization tools for creators and advertisers. Key financial ratios have witnessed notable improvement in the past year but are still well below the industry average, and it’s unlikely that Pinterest can recreate its magic in the current financial year given higher interest rates, geopolitical instability, fall in MAU and its own anticipated increase in operating expenses. 

Pinterest can’t afford to play a catch-up exercise anymore and has to find ways to stay ahead of the curve; it can do this by embracing its uniqueness and developing niche features that further the engagement of its power users. 

Ultimately, most of Pinterest’s problems can be traced back to its relatively smaller user base compared to its peers. An increased number of users can induce advertisers to spend more on the platform, increase revenues, open up alternative revenue streams, fuel innovation and help build reserves to acquire smaller competitors. So, for now, Pinterest has to be laser-focused on shoring up its user base. 

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