Pinterest (PINS 3.85%), the low-profile, not-quite-social network, has been a solid winner among stocks with initial public offerings this year.
Shares of the virtual pinboard are up nearly 60% from its initial offering at $19 in April, and the company is fresh off a strong second-quarter earnings report. Pinterest posted another round of impressive growth with revenue up 62% to $261.2 million, and its adjusted net loss narrowed from $34.2 million to $24.5 million. In another positive sign, monthly active users (MAUs) increased 30% from 231 million to 300 million. The bulk of that growth came from international markets, as MAUs outside the U.S. rose 38% to 215 million; in the U.S., MAUs increased from 75 million to 85 million.
Where will Pinterest be in five years? It's not easy to chart out a course for a unique company that's only been public for four months, but the early reports from the discovery-based search platform offer some clues. Let's take a closer look.
Image source: Pinterest.
An international flavor
Like the leading social networks, Pinterest is seeing an increasing percentage of its user base come from international markets. As of the most recent quarter, 72% of its users came from outside the U.S., though the bulk of its revenue still comes from the domestic market, which generated 91% of its revenue last quarter.
In international markets, Pinterest faces both a challenge and an opportunity. The company's international average revenue per user (ARPU) is much lower than it is in the U.S., at just $0.11 (versus $2.80). That gap is similar to what social networks like Facebook have experienced. American consumers tend to be wealthier and more desirable for advertisers, so whether Pinterest can build an effective advertising business around its international users will be a big determinant of its future success.
The company highlighted the internationalization of its ad business in the recent quarter, and indeed ARPU rose from $0.05 to $0.11, a positive sign. As Pinterest rolls out new products and recruits new advertisers those numbers should steadily rise, but investors should still expect the gap between U.S. and international ARPU to persist. (In the most recent quarter, Facebook had $33.27 ARPU in North America but just $7.05 globally, which includes its home region; Facebook's ARPU numbers also show how much more room there is for Pinterest's advertising business to grow on a per-user basis.)
In its recent shareholder letter, Pinterest said that revenue from large Canadian advertisers more than quadrupled in the second quarter, and it's replicating that approach in France and Germany, a sign it has plenty of room to grow in developed international markets. As of the end of the second quarter, the company was only serving ads in 19 markets, up from 13 in the first quarter, showing its has plenty of ad growth ahead of it internationally.
Product improvements
Outside of the large opportunity in international markets, Pinterest's biggest opportunity is in improving the product itself, both for users and advertisers. It's working on a number of promising innovations, including video, which it's found to be stickier than photos -- users re-pin video 40% more than static content. Pinterest also said it had more video views in the second quarter than it did for all of 2018. Much as new formats like Stories have driven engagement at social networks like Snap's Snapchat and Facebook's Instagram, video seems destined to do the same for Pinterest over the next few years.
To improve the business, Pinterest is also making the site easier to shop on. The number of products available from retailers increased 50% in the second quarter, as the company launches tools to make it easier for businesses to acquire customers through Pinterest.
Over the long term, Pinterest aims to use computer vision to improve the recommendations and utility of its service, and to localize content to make it more relevant to users around the world. It plans to build its advertising businesses by scaling current advertisers -- many of whom are large CPG (consumer packaged goods) companies -- and getting an increasing share of their advertising spend, and to attract new advertisers in verticals like automotive, technology, and travel, by increasing its presence and pins in those areas.
Where Pinterest will be in 2024
The future is wide open for Pinterest. The company has a unique and promising product with a clear appeal to advertisers, so its status five years from now will ultimately depend on management's ability to execute.
Looking at Pinterest's recent growth, we can estimate a range for key metrics in 2024. Over the past three years, it has grown its user base between 45 million and 65 million a year. A best-case scenario might assume that growth improves to 65 million, giving the company 625 million users in 2024. On the other hand, growth could slow to just 30 million a year, bringing the total to 450 million. Splitting that difference gives Pinterest approximately 540 million monthly active users.
As for average revenue per user, it's clear Pinterest is making progress in this area, but the expanding share of international users could put pressure on the metric. From $3.46 globally, a best-case scenario might see ARPU improving to $12 by 2024, while a more modest forecast would be $6. At the high end of the ARPU and user ranges, Pinterest could have $7.5 billion in revenue by 2024, representing a compound annual growth rate of close to 50%. At the bottom end, however, the company could have just $2.7 billion, for a CAGR of just 20%.
Profitability five years from now is harder to deduce, but Pinterest is already making significant steps to profitability -- in the second quarter, it cut its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) margin in half, from 20% to 10%. On an adjusted basis, it seems fair to expect Pinterest to be profitable by 2024. The majority of the company's spending goes to sales and marketing and to research and development, costs that are important for driving the long-term growth of the company, but that the company can easily control. Considering the fat profit margins of companies like Facebook and Alphabet's Google, Pinterest could eventually see significant profits down the road, though single-digit profit margins seem most likely in 2024.
At a price-to-sales ratio of about 16, the stock is highly valued. But with a unique niche in social media and search, and a promising future, Pinterest has the potential to surprise even the bulls five years from now.
