Stock Pinterest: its valuation looks attractive – but watch out for TikTok (PINS)
Pinterest, Inc. (PINS) was one of the high-flying social media stocks that rode the tailwinds of the pandemic as the stock hit all-time highs (ATH) in early 2021. However, those tailwinds that spurred its growth quickly turned into headwinds as the economy reopened. As a result, the stock also lost 70% of its ATH value as investors turned their attention away from PINS.
Nevertheless, the company reported a reasonable FQ4 earnings card. Even though its monetization continues to look robust, its monthly active users (MAUs) have continued to decline. However, the market chose to look beyond this time given its valuation.
But, we think its fundamental thesis could have changed given the ascendancy of TikTok (BDNCE). As Pinterest prepares to compete in short-form video, TikTok clearly holds the lead now as it penetrates more commerce into its app.
Pinterest’s MAU was down, but ARPU was up
Pinterest’s fourth quarter results showed that its growth continued to slow, with revenue growing only 20% year-on-year. Notably, its growth was 43% in the previous quarter. Nevertheless, its adjusted EBITDA remained robust at 41%, but its MAU continued to decline, as seen above. Pinterest saw declines in its international and US segment, which the company attributed to reopening headwinds, and Google’s (GOOGL) (GOOG) algorithm changes. These changes resulted in lower search traffic to Pinterest. Notably, the company clarified that it is still making the necessary adjustments during the earnings call.
Nonetheless, its monetization engine continued to show resilience, with its ARPU in the United States rising to $7.43 and $0.57 in its international segment. Consequently, it helped lift its global ARPU to $1.93, up 23% YoY and 37% QoQ. So, Pinterest’s ARPU numbers also clearly reflected a deceleration from FQ3’s 37% growth rate.
But, the market didn’t drag the stock down despite its mixed earnings chart. Therefore, it’s also a positive sign that his strong fall from grace could have explained the headwinds in his FQ4 chart.
What about the TikTok threat?
Pinterest has always presented itself as a single platform, unlike its social media peers, such as Meta Platforms (FB), Snap (SNAP) or Twitter (TWTR). It has positioned itself as the platform primarily designed for shopping and not for “eyeballs”. Therefore, Pinterest believes this is the key differentiator for bringing e-commerce onto its platform and increasing its monetization potential.
We think Pinterest’s monetization metrics speak for themselves, as its growth has slowed. Additionally, management also alluded to competitive pressure without specifically referring to the TikTok threat, as CEO Benjamin Silbermann explained (edited):
In the fourth quarter, we saw the MAU decrease by 6% year-over-year to 431 million. This was primarily due to the continued unfolding of the pandemic, declining traffic from search, and increasing competition for user attention. I would say that competition for the kind of user attention and time is probably the most competitive industry in the world right now. So of course, we think of TikTok. We also think of Meta. We also think of Google. But we also really try to focus on what we can offer that is different. (Call on Pinterest FQ4’21 results)
Therefore, it is clear that Pinterest also has to compete with its rivals for attention. Unlike the search activities of Amazon and Google, where consumers have a clear intent, Pinterest still needs to be discovered. We really like Pinterest’s underlying thesis before. But, we think recent developments over the past year have proven that its platform isn’t as “insensitive” to intense competitive pressures as we thought. Additionally, Meta Platforms also communicated the fundamental threat of TikTok as a platform for attention and commerce. Investors need to be clear about the incredible momentum TikTok has created. Thus, it would be essential not to rule out its threat to Pinterest’s e-commerce thesis and monetization ability.
Pinterest has already announced that its revenue is expected to slow as it focuses on short-form video. It’s becoming increasingly clear that Snap and TikTok continue to dominate in this space, given Snap’s robust results seen recently. We don’t know if Pinterest can operate efficiently while monetizing at a lower rate. Shortcut video is where TikTok has clear leadership, and its top-notch creators are unlikely to move to Pinterest, where the platform is entirely different. If it was that simple to execute TikTok’s strategy, we would have heard it from Meta Platforms. Pinterest will now have to compete with Instagram Reels, Snap Spotlight, YouTube Shorts and of course TikTok. We can’t say for sure that Pinterest is clearly differentiated now. Because all these platforms also have an e-commerce strategy. Additionally, Pinterest has also emphasized competitive pressures for attention, as mentioned earlier.
Additionally, TikTok has amassed a massive installed base of over a billion users. Therefore, TikTok is stepping up its mission to gain a foothold in the short-format video space to drive commerce as part of its “Shoppertainment” strategy. If you don’t think it looks like or even better than Pinterest, read on, as TikTok pointed out (edited):
TikTok has become so well-known for helping brands and products take off that it’s often covered in the news. In fact, many e-commerce apps and retailers use #TikTokMadeMeBuyIt themed campaigns to recommend products to shoppers. when browsing their app or physical store. As people become less satisfied with most advertisements they see online, they are looking for genuinely entertaining advertising experiences, especially when it comes to commerce. In fact, 1 in 3 consumers want commerce to be more entertaining. All of this underscores the need for a new way for brands and consumers to interact. And this unmet opportunity lies at the intersection of entertainment and commerce, what we call Shoppertainment. Entertainment powerhouse TikTok has now propelled itself to the forefront of commerce with Shoppertainment. (ICT Tac)
Ratings from Pinterest and its peers have been reduced – but wait for now
There is no doubt that the valuations of Pinterest stocks and its peers have been reduced, as shown above. As a result, Pinterest stock is trading well below its 2-year average of 12x. But Pinterest has also grown much faster over the past two years. Going forward, management guided first-quarter revenue to grow “into the 1960s” year-over-year. Consensus estimates point to an increase of 18.3% YoY in Q1 and 21.8% YoY for FY22. However, management has also guided “non-GAAP operating expenses to increase approximately 40% year-over-year” as it invests in improving its ecosystem of creators and content and in increasing the number of staff. Therefore, Pinterest’s revenue and profitability are expected to be impacted simultaneously.
Additionally, the price action of PINS stock has also turned distinctly bearish as it seeks a bottom. Given its current valuation, it is possible that the stock will find a potential bottom soon. Usually, this would have presented a great entry point for the PINS stock. But, we think the stakes have changed with the rise of TikTok that we hadn’t considered much before. TikTok will likely continue to compete for users and ad dollars aggressively.
Additionally, Pinterest’s strategy has been reactive, as we believe management may not have accurately anticipated the threat from TikTok, similar to Meta. By contrast, Snap has positioned itself much better to deal with TikTok’s encroachments than its rivals. So, we think the fundamental thesis of Pinterest has changed. And considering that its thesis has changed, its attractive valuation wouldn’t matter as much.
Thus, we will give the management some time to prove their execution first. As such, we’re revising our rating on Buy to Hold’s Pinterest actions for now.