This blog is an excerpt from a 61-page detailed report titled “Pinterest: At the Intersection of Shopping, Search and Social.” For more information, please login to your SharesPost account or register here.
The subpar first-quarter results that followed Snapchat’s successful IPO have put a spotlight on the next social media platform waiting to go public: Pinterest.
Founded in March 2010, Pinterest has an impressive track record: It has raised $1.3 billion in capital, has garnered an $11.5 billion valuation, and is the fastest social media networks to reach the 10 million monthly active users (MAU) milestone. As of April 2017, Pinterest announced that, globally, it had 175 million MAUs. To date, that number equates to more than 2 billion monthly searches generating more than 80 billion pins. We estimate that Pinterest has roughly 80 million MAUs in the U.S. today, a number that chases Snapchat’s estimated 90 million and Facebook’s 235 million. In other words, Pinterest is probably the third-largest social network in the U.S. today.
However, investors have plenty of reasons to be cautious about Pinterest: intense competition, profitability potential, and, most importantly, the valuation. Furthermore, history has not been kind to No. 3 players in key consumer Internet verticals. Think of Yahoo vs. Google/Facebook, online travel agencies vs. Priceline/Expedia, e-commerce players vs. Amazon/eBay, and so on. All these concerns raise an obvious question: Does Pinterest have the staying power to thrive in the Internet ecosystem?
Pinterest CEO Ben Silbermann thinks so. Recently, he has mentioned that there is a fundamental difference between Pinterest’s value proposition and the value proposition of other social media networks – and we agree. Our Pinterest user survey provides clear evidence of four unique, powerful characteristics of Pinterest users: (1) Users skew heavily toward the millennial and female demographics; (2) Users’ primary purpose is browsing products; (3) Most users have bought or considered buying products seen on Pinterest; (4) About 60 percent of users log on the Pinterest website or app on a daily basis. You can find a detailed analysis of Pinterest, including our survey of 3,500 social media users, here. Pinterest’s user characteristics, as well as users’ search and pinning activity, reveal a wholly differentiated offering at the intersection of search, e-commerce, and social networking.
Our analysis of Pinterest’s customer case studies implies a fairly even split between two key advertising objectives: raising brand awareness and growing sales and traffic. Despite the company’s sub-scale user base (compared to Google and Amazon), Pinterest’s 2 billion monthly “commercial” searches already comprise 13 percent of Google’s estimated 15 billion monthly “intent-driven retail” searches and 10 percent of Amazon’s estimated 20 billion monthly product searches.
“With social networks, it’s them time. With Pinterest, it’s me time.”
How Will Public Markets Value Pinterest? If Pinterest pursues an IPO, and if Pinterest goes public in the first half of 2019 (roughly 18–24 months from today), prospective and potential public investors will likely calculate the company’s Enterprise Value based on a blended average of 2019 and 2020 financial estimates. We realize there are a lot of “ifs” in this scenario; however, based on publicly available information and the application of reasonable growth rates to user-base and monetization rates, we’d expect Pinterest’s revenue to grow between $1.2 billion in 2019 and $1.6 billion in 2020, expanding at 40–45 percent year-on-year. Applying a “low teens” EV/Revenue multiple yields a “mid-teens” billion-dollar valuation for Pinterest. Simply put, we believe Pinterest can grow beyond its current private valuation based on fundamentals.
“’Public’ has never been the goal; instead, it’s how can we build a company that can forward invest, and a lot of those resources should come from revenue.”
Another way to benchmark Pinterest’s potential valuation is by comparing the monetization levels of its peers, including Facebook, Twitter, and Snapchat. In other words, we look to the “market cap per user” metric, which reminds us of the IPOs of 2000. Yes, this goes back to the dot-com days when “market cap per eyeball” was considered a legitimate valuation multiple. However, since those days, the venture-backed space and business models have matured significantly. Today, “monetizing eyeballs” has a proven track record, and thus we are bringing back this metric. We illustrate this analysis in the chart below. Today, Pinterest’s market cap per user is below the group average. A glass-half-empty interpretation is that Pinterest’s monetization clearly lags behind its peers. However, another way to interpret the chart is: Pinterest has a pathway to a higher valuation if it continues to grow its user base. Pinterest’s Enterprise Value would be roughly $19 billion (about 65 percent higher than today’s $11.5 billion valuation), if we apply $113 per MAU and $170 per DAU multiples to its 175 million MAUs and estimated 100 million DAUS.
Where Could We Go Wrong? Pinterest’s ability to grow significantly beyond its current private valuation still heavily depends on its execution over the next 18–24 months. Its growth also depends on investor sentiment, which will govern the Revenue or EBITDA multiples. Most crucially, a premium valuation rests on the assumption that Pinterest will continue to grow its consumer adoption and monetization levels. If Pinterest is successful on both fronts, it will indirectly help the company with operating costs and pave the way to profitability. However, the risk is that competition may lead to substantially higher marketing expenses. Furthermore, Pinterest has been an early adopter and vocal advocate of Amazon Web Services – and, in the case of Snapchat, cloud computing has had a negative effect on gross margins. Pinterest’s planned major ad campaign in 2017, along with a ramp-up in usage and spend on Amazon Web Services, will likely weigh on its near-term profitability.
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