Pinterest

Q4 22’ SUMMARY

Pinterest delivered Q4 22’ results that were moderately weaker than consensus estimates and the Pragmatic forecast. The weaker performance was driven by factors largely out of Pinterest’s control- CPG and SMB advertiser weakness driven by conservatism sparked by widespread macro fears. Also, the business experienced meaningful headwinds in international markets, which caused reported revenues to materially lag constant currency revenues.

On a positive note, Pinterest saw meaningful strength from global businesses based in the US. Also, Pinterest saw meaningful improvements in MAU across the entire business. Interestingly, the business saw material improvement in session frequency, which caused weekly average users to exceed monthly average users, which meaningfully improved in Q4.

Pinterest was able to gain share by executing on a compelling business model designed to grow a platform of commercially engaged users and leverage this “demand signal” data to drive monetization. Pinterest continued to benefit from capturing internally generated first party signals as Meta and Snap continue to suffer from the Apple privacy change given that these businesses relied on Apple to generate first party signal data.

Pinterest’s new CEO delivered meaningful updates on the key growth initiatives centered on making Pinterest more shoppable. Additionally, he shared updated on the rollout and early results of several new AdTech enabled features that drive the platform’s value proposition. Importantly, the business is in a great position to continue growing now that user growth has remained positive after several quarters of contraction.

Overall, the digital advertising market is demonstrating resilience despite recent weakness relative to last year, which was a year marked by immense growth. Consumer behavior continues to drive digital advertising spend as advertisers need to “follow the eyes”, which continue to favor the digital channel. Pinterest is well-positioned to take even more share given the significant value advertisers can extract from Pinterest’s unique platform of commercially engaged users.

Key Takeaways from Q4 22’

Key Takeaway 1- positive engagement trends

• Pinterest’s engagement trends have turned a corner with MAU’s growing on an annual basis for the first time since Q3 21’, which serves as strong evidence that the COVID headwinds have abated.

• Engagement on Pinterest’s app continued to materially outperform engagement on the web-based platform.

• Pinterest drove engagement by using machine learning to enhance personalization and relevance, which helped compound positive engagement trends driven by a massive increase in video content.

Key Takeaway 2- continued monetization momentum

• Pinterest drove compounded ARPU growth despite industry headwinds due to increased user engagement as well as strength from global brands.

• The business drove monetization by selling advertisers on the benefits of using the platform across the full funnel (awareness, consideration, and conversion).

• Pinterest continued to develop and introduced features that advertisers demand such as ad load optimization integrated on full pages.

Key Takeaway 3- MASSIVE digital advertising TAM

• Market research firm eMarketer continues to forecast strong digital advertising spending in 23’ despite headwinds many advertisers are navigating.

• The firm also stands by the forecast that global digital advertising spending will continue growing despite macro headwinds in Europe.

• Pinterest’s massive video content expansion positions the business to capture share of video advertising spend, which is growing much faster than other ad types.

GROWTH TRENDS

growth Factor 1- platform engagement normalization

Pinterest was able to continue driving engagement on the platform in Q4 22’, which is a clear indication that the business has lapped the COVID effects and identified the drivers of engagement on the platform in the current iteration. The implementation of platform enhancements focused on relevance and personalization has driven engagement per user to record levels. Pinterest has historically been an episodic platform in which users visited for specific reasons. The optimized feature set has driven visits per users much higher; however, the business has noted that there is still significant progress to be made on this front.

In addition to user experience enhancements, Pinterest has made significant strides in increasing the video content on the platform. As a reminder, Pinterest was well behind the curve on video content, which was likely an addition reason for Pinterest’s engagement headwinds. The business has been having significant success with integrating video content on the platform, which has driven engagement as well as monetization. This provides substantial evidence that the new CEO was right to shift the business strategy away from Idea Pins.

Pinterest has also driven engagement by continuing to make the platform more shoppable. Platform users have a high commercial intent when they use the platform compared to other social networks. People use Pinterest to develop visuals for preexisting ideas related to a broad set of activities. Management has found that the platform had an “engagement leak” in which the dearth of shoppable content led users to leave Pinterest to initiate transactions. Overall, Pinterest has significant engagement opportunities within reach in 23’, which positions the business well from a flywheel perspective.

• Global mobile app MAU increased 14%, which is much faster than the total MAU figure (4%).

• Global mobile app MAU’s drive about 80% of Pinterest’s impressions, which means this contingency of users is mission critical.

• Sessions growth outpaced user growth, which has resulted in weekly average user growth exceeding monthly average user growth.

• Pinterest has significant engagement opportunity by converting the hundreds of millions of users that only use the platform episodically into more frequent users.

• Shopping has been identified as a driver of material engagement growth.

• Video content increased 30% y-o-y, which has driven videos to represent about 10% of engagement.

• Weekly average users to monthly average users was 61%, which is a company record.

• While the WAU to MAU is a company record, it is still well below peers thus creating a major opportunity to be unlocked.

• Shoppable ads increased 50% y-o-y, which helps to address the ~50% of Pinterest users who regard the platform as a place for shopping.

growth Factor 2- significant monetization potential

Pinterest is on a journey to drastically increase the platform’s monetization as it remains in an under-monetized state. This means that the platform is essentially wasting money so long as the deficiencies exist. In effect, Pinterest’s platform and the platform’s monetization are misaligned given that the platform’s scale should be driving much greater ARPU than it has achieved. While Pinterest has been driving durable ARPU growth by developing and implementing a series of AdTech enabled features, the platform’s monetization is well below that of Meta and Snap. This disconnect is particularly interesting due to the fact that the platform’s are selling almost identical products in the form of impressions to consumers. Even more interesting is the rare commercial intent that Pinterest users possess which should make Pinterest ads even more valuable than other platforms that are more entertainment/socializing in nature.

Pinterest has continued to develop AdTech that is designed to advance the monetization journey. The focus of Pinterest’s AdTech is to make the advertising service more performance oriented thus helping advertisers more clearly see the value that ads on Pinterest create. These enhancements are in the form of insight-based selling, automation capabilities, campaign tools, measurement functionality, and ad format optionality. Advancements in these areas have been drivers of ARPU growth as advertisers have grown accustomed to these features from Meta and Snap. While impressions is the fundamental service that advertisers demand, advertising at scale is much more nuanced so additional functionality has become table stakes. In addition to delivering additional capabilities, Pinterest has continued to make strides in advancing the “shopability” of the platform. This is an important driver of monetization as it creates the link between commercial intent of users and conversions that advertisers pay top dollar to drive.

• Pinterest drove demand across each sales funnel section, which led to 1/3 of revenue being derived from each section.

• Spending intentions established in JPB’s increased 37% y-o-y, which is continued growth from the 35% growth in 1H 22’.

• Sessions growth makes each user more valuable as this means that more ads can be shown to these users.

• CPG and SMB advertisers reduced spend driven by broad conservatism in the digital market.

• While video content accounts for 10% of engagement, it accounts for 30% of revenue as this content type has a much higher level of monetization than non-video content.

• Pinterest drove ads across the funnel based on communicating that advertisers who have multiple objectives realize a 50% sales lift compared to those with only one objective.

• Pinterest launched Ad Load Optimization, which is a dynamic ad serving technology that recognizes when a user is in a “commercial” state so a greater ad load would be accepted.

• Ad Load Optimization has driven relevancy along with lower CPA (cost per action).

• Pinterest’s recently released Conversion API continued to deliver strong ROI with advertisers that use it realizing a 14% conversion lift and 28% improvement in CPA.

• Pinterest introduced a new technology known as Mobile Deep Linking (MDP), which is a substantial advancement towards closing the “engagement leak” through directing users to product pages in a highly efficient manner.

• Ad Stack enhancements have led to a 15% lift in monetizable inventory.

• Pinterest is planning to work with 3rd parties to bring more advertisers onto the platform (e.g., DSP’s, retail media advertising platforms).

growth Factor 3- scaling global platform

Pinterest’s opportunity is massive when considering the TAM of the global digital advertising industry. While the domestic business represents the large majority of Pinterest’s revenue, the international business is much larger from an engagement perspective. This presents significant monetization opportunity as Pinterest develops relationships with global advertisers. The company is focused on developing AdTech to monetize the domestic business more fully; however, the international business will be better monetized as the domestic business is placed in the right position.

In Q4, Pinterest experienced continued cross currents in the international markets, especially in Europe. While growth turned negative in Europe, this was entirely the result of FX headwinds as constant currency revenue growth was close to 5%. Additionally, the European platform experienced engagement trends that were even stronger than the domestic business. On the RoW side of the business, growth continued at a fast rate although it would have been 32% in constant currency as opposed to the 28% reported. This platform continued to outperform the domestic and Europe platforms from an engagement perspective as MAU’s increased more rapidly. Additionally, monetization on the RoW platform continued to materially outpace that of the domestic and European platforms as this market is still in a high growth mode.

OPERATIONAL EFFICIENCIES

Pinterest has continued to retain a large degree of the operating leverage generated in 20’ and 21’. This leverage has been driven by Pinterest’s MAU levels as well as the massive monetization growth driven since 20’. While margins materially compressed in Q4 22’, this is more of an investment in future growth than operating deleverage from inefficiencies. Additionally, margin compression was more favorable in Q4 22’ than levels in Q3 22’. Majority of the additional expenses relate to model development and sales related activities. Importantly, Pinterest has now concluded the investment year laid out in early 22’. These investments position the business for accelerating growth in 23’ as well as operating leverage as 22’ becomes the base for growth calculations.

INDUSTRY TAILWINDS

While the digital advertising industry has been receiving significant negative press in recent times, the underlying market remains intact. This is largely driven by megatrends that transcend negative sentiment and uncertainty. The fact is that business have integrated advertising into their business models, which means that they need to continue advertising in order to drive traffic and sales. If businesses could simply grow without advertising then they would have done so many years ago. Interestingly, competition for consumer’s dollar incentivizes businesses to continue advertising to attain mindshare above the competition.

Advertisers are certainly becoming more selective with their spending as they are focused on identifying advertising with a measurable ROI. This means that some players will win share at the expense of others that lack demonstrable ROI advantages. Companies are continuing their hiring, consumers are continue their spending, and digital activity continues compounding. These are likely to drivers behind market research firm, eMarketer’s forecast for continued strong growth over the next several years on a domestic and global basis.

FORECAST AND VALUATION

While Pinterest’s results were below consensus expectations and the Pragmatic forecast, the business’ trajectory in 23’ is even stronger than anticipated. Importantly, the miss in Q4 was driven by softened digital spending and FX headwinds rather than problems in the business. This is corroborated by the strength in platform engagement and continued monetization growth. While the average revenue per user figure only modestly increased in Q4, this is largely the result of weaker digital ad prices as many advertisers opted to be conservative with spend in preparation for a potential turn of trends on a macro level.

The business is in a great position to drive accelerated revenue growth in 23’ as the headwinds in 22’ are lapped. Additionally, the business will be in a much better position to realize material benefits from the significant AdTech stack improvements in 22’. Although advertisers demonstrated positive attitudes towards the improvements, many are still in early stages of being adopted by large advertisers. This is a great set up for 23’ as the monetization increases on top of a return to user growth that really took off in 2H 22’. Additionally, Pinterest has material upside from continued video integrations, joint business plans (JBP), and forthcoming deals to bring third party demand on to the platform.

Pinterest’s profit outlook is much stronger than anticipated as the recovery in efficiencies will be much more rapid than expected. After making meaningful OpEx investments in 22’ to prepare the business for the next stage of growth, Pinterest will benefit from these investments in 23’ without incurring a proportionate increase in expenses. In fact, management stressed that expense efficiency will materially improve with each passing quarter in 23’. As a result, Pinterest is likely to drive margins near 21’ levels as the business will have even greater scale without the need to increase expenses on a material basis. This positions the business to drove profit growth that far outpaces revenue growth in 23’.

While the market has started to demonstrate more interest in owning Pinterest’s stock, there still remains significant upside. The business’ operating leverage will drive profitability far greater than pre-pandemic levels; however, valuation remains well below pre-pandemic levels. This disconnect between profitability and valuation is likely to materially converge in 23’ as Pinterest delivers earnings that are well above consensus expectations. Additionally, the stock is well positioned to benefit from the shifting macro sentiment as the US economy continues expanding, inflation continues normalizing, and the Fed turning dovish as these events unfold.