Pinterest (PINS) has been one of the few social media plays on which I have generally been constructive on the back of two main reasons: The business is a combination of savvy social media with commerce, and second, the huge international monetization opportunities still ahead.

Early in May I looked at the shares after the company reported first-quarter results in the midst of the Covid-19 crisis, with shares having nearly doubled from the Covid-19 induced lows of $10 to $19 per share. That impressive recovery brought shares back to levels last seen late 2019, marking quite an outperformance.

The Thesis

As mentioned in the introduction of this article, there are two reasons why I like Pinterest. Let’s dive a little deeper into the first argument as Pinterest is less ”annoying” to users than other social media companies and actually plays quite a useful role for its users, with targeted adds having the potential to contribute to the like ability and use ability of the platform instead of being detrimental. Furthermore, the opportunity to place ”pins” creates a pull model resulting in solid engagement and less of a feeling of being spammed, with the goal being about ideas/products, not so much people.

The second reason for my optimism was the huge upside in the international business. ARPU for US users rose 34% to $12.07 in 2019, and despite ARPU for international users being up 115%, it came in at just $0.54 per user, leaving huge opportunities. While other social networking companies have large gaps as well between domestic and international users’ ARPU, this gap is typically a few factors lower.

What happened since the public offering is that growth has been quite sound, as this $300-million business in 2016 has grown to become a $1.14 billion business in 2019, with sales essentially having quadrupled. The issue is that of the margins as the company reported adjusted EBITDA of $17 million for the year 2019, yet that metric is highly distorting. While the interest, depreciation and tax portion of the reconciliation to net income is not that significant on a combined basis, stock-based compensation is huge and ran at nearly $1.4 billion in 2019 although that number is not really representative as well with the company having gone public that year. Nonetheless, the run rate based on the Q4 numbers still approaches half a billion, resulting in real and sizable economic losses for investors.

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Trading at $25, the $14-billion equity valuation translates into a $12.3 billion enterprise value in February when the 2019 results were revealed, making that shares traded at 11 times trailing sales. Comforting was the 2020 guidance which called for sales of $1.52 billion, yet no real progress on the margin front was anticipated.

Good, Better, Good (Again)

Early May the company reported first-quarter revenue growth of 35% with sales advancing to $272 million as the EBITDA loss of $53 million was a little higher compared to the year before, with GAAP losses of $141 million mostly being higher as a result of the huge stock-based compensation expense.

Worse was the comment that April revenues saw single-digit declines which undoubtedly would result in ballooning losses in the near term, yet the $1.7 billion cash position would come in handy in this environment. Nonetheless, if the situation stabilized I did not see a reason to not expect revenues to come in at approximately $1.5 billion in 2020, reducing forward sales multiples to 7 times sales. That being said, shares have nearly doubled from the recent lows and shares actually outperformed many companies, all while the company could not escape cuts in advertising budgets. Therefore, I concluded to be constructive, yet hold a neutral stance at $18 in May.

On the final day of July, the company reported much-awaited second-quarter results. Revenues rose 4% to $272 million as it was clear that the organization had to adjust to the slower revenue growth pace with EBITDA losses increasing from $26 million to $34 million. Including stock-based compensation, the GAAP result came in at $100 million.

Cuts in advertising budgets were clearly seen with quarterly US ARPU down from $2.80 to $2.50, as international ARPU rose from $0.11 to $0.14. More impressive was growth in the user base, with the total number of US monthly active users up 13% to 96 million, while the international user base rose 49% to 321 million, leaving the company well-positioned. After all, if the economy recovers and users hang on to the platform, it sets the company up for a great recovery.

Comments about the current performance made investors enthusiastic as revenue for the month of July are estimated to be up 50%, with the company believing that third-quarter sales could increase 30% as investors clearly believe this number is conservative. Given the recent cost-containment efforts, one might even expect some nice operating leverage on this sales growth, allowing for (economic) losses to be reduced.

Some Thoughts

The 587 million shares outstanding saw a massive lift as they rose overnight from $25 to $34 as Pinterest has been seen as a safe harbor. People across the globe became bored, have more free time and are willing to spend time and are willing to learn about new hobbies/inspiration, as well as home chores and decoration being on the rise. The problem seems that the great expectations have run a bit too far as the equity valuation has risen from just about $5 billion during the worst days amidst Covid-19 to $20 billion now. With net cash balances of $1.7 billion being stable, operating asset valuations have tripled from $3 billion and change to $18 billion!

Amidst all of this, I still see a really viable route/pathway for roughly $1.5 billion in sales this year and while the company might be able to squeeze out a small EBITDA profit, realistic losses still run to the tune of several hundreds of millions in all likelihood. This continued dilution by ignoring stock-based compensation really adds up and after the massive jump in the wake of the second-quarter results, valuation multiples have expanded to 12 times sales (forwards) sales again.

Another plus in this environment is that the company is not seen as a political platform and hence has benefited from boycotts by advertisers on other platforms, while ROIs through targeted users make the economic rationale for advertising through the platform vs. other platforms already look very good.

Quite frankly I am kicking myself for not being a bit more aggressive during the downturn to scoop up a few shares and while I remain truly bullish on the long-term potential for the company and shares, I am not rushing to chase the shares here after the big break higher.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.