June 9, 2017 | Webinar

Pinterest: Love Child of Amazon, Google, & Facebook?

Rohit Kulkarni 00:13

Okay. Good morning again. We are going to go ahead and get started. Happy Friday and good morning everyone on the West Coast, and good afternoon for anyone who is joining us from the East Coast. On behalf of everyone at SharesPost, I would like to welcome you to today’s webinar. The topic is Pinterest: Recapping a few highlights from our recently published research report. I am Rohit Kulkarni, I’m the managing director of the private research group at SharesPost. Among other things, I look over the website content, our data and research group here at SharesPost. Before we jump into the main part of the webinar, for anyone who’s joining us for the first time, SharesPost is a financial services forum bringing together shareholders and individual and institutional shareholders to create liquidity within the private tech growth asset class.

Rohit 01:08

Here are just a few issuers that we have transacted over the last four to five years and these are a few research reports that we have published so far. They are available on our website for download once you register and below is a link for you to go. The game plan at SharesPost research has been-- we just want to analyze the drivers and market conditions leading up to the creation and proliferation of all the “unicorns”. And also to review fundamental trends, investment thesis of well-known, large private companies. So far, we have published a bunch of blogs, as well as done a bunch of expert webinars. We’ll welcome your suggestions for future search reports. You will find all of this on our website once you log into your account on SharesPost.

Rohit 02:03

Jumping into the main topic, Pinterest, this is the agenda for the next 20 to 25 minutes. I’ll be taking questions real time and as in when they come through, I’m happy to answer them. I’ll read all your questions at the end. Pinterest, I’m sure many of you who are able to-- we are getting some feedback that we aren’t able to see the slides. Give me one second. [silence] Just trying to make sure that the slides are visible to everybody. So okay, now on this slide, just recapping Pinterest’s evaluation and funding history. They have raised almost 1.4 billion dollars in total equity capital. They haven’t yet raised that so far. [inaudible] post mark value and a few of the VC investors, several institutional or public equity investors such as Wellington, Fidelity, Goldman Sachs have also invested. The most recent valuation for Pinterest was approaching 12 billion dollars.

Rohit 03:35

And coincidental with what they have been able to raise in terms of funding, its story has been about growth in users and growth in engagement of users. They launched in March of 2010 and was among the fastest social media network to reach 10 million monthly active users, MAUs. And since then, they have steadily increased the number of users. Most recently, just six weeks back, they announced that they have reached 175 million monthly active users. We estimate about 80 million of them are in the US, so they are pretty sizable and very well penetrated

Rohit 04:17

Before we jump into the investment thesis, we think Pinterest would be a viable and a good candidate to go public. And if it goes public, we don’t have a crystal ball here, but if it goes public, if it decides to go that route over the next couple of years, just putting a dartboard, say around first half of 2019, we would guess that prospective public investors would calculate its value based on 2020 estimates. So, that’s still three years out, many things can go in Pinterest’s favor and against Pinterest over the next two or three years, a lot of ifs. But based on publicly available information, we apply reasonable growth rates to what we know so far about Pinterest, what they have told us publicly in the media, and extrapolated those trends knowing what has happened to other similar networks until then.

Rohit 05:18

We think by 2020, Pinterest could approach 400 million monthly active users globally and probably earn about four dollars per year from each of those users. And that gets us to about the low-teens revenue mark multiple about 1.5, 1.6 billion dollars in revenues. That gets to a low teens and billions of dollars of market cap. So, that’s a pretty big potential IPO for Pinterest. But also, what does it mean from a profitability standpoint? Given the recent IPO of Snapchat and many other IPOs where we need companies or investors need companies to have a proof point about a pathway towards profitability. If Pinterest is showing a pathway or if they are showing a positive EBITDA, probably that means this IPO would be fairly successful.

Rohit 06:19

In terms of investment positives, the first and probably the most important one is Pinterest faces a pretty large addressable market. It fundamentally operates in a global advertising market, similar to Google and Facebook and many other digital media companies, and there are steady secular trends from which Pinterest benefits. For example, we have seen steadily the amount of money being spent on online media channels increase and the companies such as Pinterest continue to benefit. Also, what’s unique about Pinterest is, until date within digital advertising, search and social have remained largely distinct channels for advertisers. Search is considered as a bottom-of-funnel direct response and social has traditionally been considered as top-of-funnel, brand-advertising marketing channel. But what Pinterest we think on our blog is that Pinterest is probably a love child in a kind of a tongue-in-cheek title, but a love child of Amazon and Google and Facebook. So they are at a-- they offer a unique value proposition to both consumers and advertisers where they have an element of all three companies, which makes them very unique and unlike some other companies we have seen in the past.

Rohit 07:48

That leads me to the next point. Because look at the survey of Pinterest users, more than 3,500 social media users and of those more than 2,000 were active Pinterest users. And what we find unique is Pinterest’s intent to triple users and their search and pinning activity enables the company to provide a very differentiated offering, which is also an intersection of social media and e-commerce. And our survey clearly indicates from the slide that about 50% of the users have a clear intention to browse products. And a lot of them have either bought or considered to buy those products by looking at Pinterest which creates a very compelling advertising, as well as commerce value proposition to potential customers of Pinterest.

Rohit 08:47

Also scale matters the third important positive in Pinterest. We have seen scale rise, network effects, and overuse cliche, I agree. But if Pinterest continues to grow its monthly active users at kind of a similar rate as it has, we may think it has potential to become the second largest social network or aggregation of consumers on a single platform. Today we think they are trailing Snapchat by about five to 10 million users per month. And as you can see, they are fairly close and remain a very fast follower. And scale continues to matter in today’s day and age.

Rohit 09:37

Probably, a clear differentiation for Pinterest toward to some other social network is their user base cues towards two very attractive demographics. It is predominantly female and it is predominantly younger population. We definitely know from a common standpoint,  advertisers and retailers would love to have an intersection of women and millennials, and that creates a fairly sticky mouse trap for Pinterest’s customers as such. Also from an engagement standpoint, public investors in social media companies tend to focus on what is the engagement and the majority in terms of number of monthly active users, divided by the number of daily active users. We estimate about that ratio for Pinterest is about 60, 60% all of Pinterest’s monthly active users probably log in on a daily basis. Just to benchmark that with other large companies, Facebook has steadily been successful in increasing that proportion or time and now is hovering around 70%. And we estimate Snapchat is will be even higher given the ephemeral nature of the product, but Pinterest is right up there. And that would be something we think would be very interesting to track over time.

Rohit 11:17

As we have seen with mostly around Facebook, social media platforms have the potential to increase monetization along with their user base. There is a circular argument here to be had, as we have seen with the companies, just Twitter, where if you are unable to grow your user base, then the likelihood of growing monetization at similar rate gets harder and harder, the marginal returns get smaller and smaller. We think Pinterest has potential to follow path similar to how Facebook went from maybe 10 dollars per user to more than 15 dollars per user over the last 3, 4, 4 years. Simply because two things. One is management remains hyper focus on user experience. And they may or on the side of delaying or under monetizing and that was something that investors in Facebook clearly have all load over a long time.

Rohit 12:20

And second, unlike any of the other social media platforms we have seen, Pinterest has a unique e-commerce offering. In our survey, we were able to find about 300 small and medium-sized businesses that actually sell on Pinterest, they have those buy buttons enabled. And they have seen more than 150,000 in gross merchandise sales attributed directly or indirectly to Pinterest. We think that number continues to rise and that is a potential for increasing the monetization on the platform over time, which we haven’t seen any of the comparable other platforms shown on this slide have. So, that’s something that’s fairly unique.

Rohit 13:05

But with investment positives, we do also see investment negatives. So there are a lot of risks to monitor in our report. We do highlight about seven or eight risks. In this webinar, we focus on three or four, which are probably the most important ones. Clearly, competition is important. Pinterest competes on a variety of levels.

Two of those kind of metrics that they compete on is share of mind or attention of consumers. We think there are about 120 minutes spent on social media and Pinterest has about 10-15% share of mind. And Facebook clearly has a very high share of mind of users, which is why it is so successful. Yet, Pinterest continues to probably please their share of mind as more and more people spend more time on social media platforms. That’s one level of competition and the second is obviously competing for share of wallet from advertisers, retailers, and a whole host of potential customers.

Rohit 14:23

Pinterest, again, given its unique value proposition has battles on multiple fronts. On one side, it’s battling with social media companies. On the other side, it’s probably battling with e-commerce companies where retailers are deciding which platform they need to allocate that incremental dollar or attention to attract their potential customers. So again, competition is something that is hard for us to kind of keep track on a continuous basis. They probably manifest into user engagement, probably manifest into how the company continues to innovate on its product, as well as how the size of the network continues to trend. So these observable factors are something that we continue to monitor to have more confidence and interest potential, to be successful in this hyper-competitive environment.

Rohit 15:25

Second and equally important is profitability. As in two or three questions come to mind. When will Pinterest generate positive free cash flow? Can Pinterest control its largest operating expense which is marketing? And what is Pinterest’s long-term margin profile look like? The key point here is we have-- history hasn’t been kind to number three players. History on consumer Internet hasn’t been very kind for how the economics for the number three player trend. Twitter was number three for a while. Probably, Yahoo was number three after Facebook and Google. Maybe in online travel, we have seen a whole host of number three players that no longer are standalone entities behind Priceline and Expedia.

Rohit 16:17

So this and that in our opinion, the way it manifest is a clear step-down profitability and a clear kind of which kind of circulates into product innovation. I believe you do invest in companies and so on and so forth. And from a Pinterest standpoint, I think they have recently announced a new marketing campaign. They continue to be big customers of Amazon Web Services. So, that probably weighs on [inaudible] profitability and that’s again something that we will track going forward. But again, from investor’s sentiment standpoint, it’s not check and go public with negative gross margins as far back as just six months ago. Then there is probably light at the end of the tunnel for companies that may not be generating positive free cash flow at IPO.

Rohit 17:20

The turning from a product innovation standpoint, it’s an arms race out there. I think Pinterest has an extremely challenging problem to solve, the CEO has been very vocal, and they have been investing quite heavily to-- essentially, in a way to on visual search. As in, you search based on what is inside a picture or a video. Google has been investing significantly for in search, so has Amazon for retail-driven-- there’s augmented reality in mobile apps and a whole bunch of innovations that we have seen. I think we estimated also one thing that we found fairly impressive for Pinterest, even a small company with a short-track record, they are not too far behind these two large stalwarts - Amazon and Google - we estimate about 20 billion retail or product searches done on Amazon on a monthly basis, we think Google is about 15 billion searches done on a monthly basis and Pinterest has announced they do 2 billion searches on a monthly basis. So I think we are comparing apples and oranges here, but this is something from a user engagement standpoint of products and innovation that they have been able to do is clearly trending in the right direction.

Rohit 18:54

Mobile video is something that we think will be on Pinterest’s mind going forward and I think they have just been slow to [inaudible] the mobile video, and we expect them to do more on this front over the next 12 to 24 months.

Rohit 19:12

Recapping a couple of things in terms of proprietary survey of more than 3,000 users base social media, again, I won’t go through all these details on the slide, but the simple headline here is, Pinterest’s users queue towards millennial and female customers, probably more so than some other social media platforms and they tend to come to Pinterest with an intend to browse product, with an intend to find something to buy, and they have done so while doing at Pinterest.

Rohit 19:53

To wrap things up, the private tech valuation frame will that be users at SharePost relies on a whole bunch of various different approaches. We have created waterfall models for more than 150 companies, that are available online. And they are done through by reading and looking through a whole bunch of public filings, they are available for investors, will log onto our website. And this just an example Snapchat from our website, which for a Pinterest waterfall is done a whole bunch of CDs of preferred shares that they have raised.

Rohit 20:36

The second obvious valuation framework we use is public comps. In case of Pinterest, probably, there is a clear precedent in terms of Facebook, which had valuation go as high as almost 15 times revenue multiple and also Snapchat which [inaudible] from this chart, which we will add very soon, which is also creating at a solid low-teens multiple.

Rohit 21:05

In terms of another approach at monetization and valuation, we think Pinterest is clearly early when you compare from what they make in terms of money per user as compared to Facebook, Twitter, Snapchat on the left side. So there is a prudential upside in valuation as they increase the monetization, so there is a circular argument to be made here. But again, this is one way that users will-- unless as we’ll probably look at Pinterest valuation.

Rohit 21:37

So I guess we’re approaching to end and then we’ll start to poll questions and this is just something-- so if people are interested in following up, reading list, watching list, there is a pretty long list in the report that we looked at while researching on Pinterest and happy to provide the full list online too. So as we poll for questions, I’m just going to pause here a little bit and Adam Pratt is online as well, he’s the marketing manager, he’s going to poll for questions and feel free to type up questions in the box on your webinar screen.

Rohit 22:21

Okay, as we wait for questions-- okay, I guess the first question we have here is in terms of profitability. "On one of the screens, you had the-- they could reach low-teens profitability. That seems really high. Is that really possible?" Okay, I think there are-- for the next couple of years, it’s hard to pinpoint what the management philosophy or their approach is in terms of profitability, but two things I would point out. One is, in the report, we highlight what Pinterest has-- we estimate spent on Amazon Web Services. They have been probably an older customer of AWS as compared to Snapchat and during Snap’s recent IPO. There was a lot of focus on the recent deals that Snapchat signed with both Google Cloud as well as Amazon Web Services. So I think my guess here is probably Pinterest ends up doing somewhat similar deals with AWS over the next 24 months. That would probably help them to a whole average through the income statement. And second is equally important is, they are looking to launch a pretty big marketing campaign. That may be on their profitability over the next 24 months. I’m giving you more bad news as compared to good, but reaching team’s profitability in the next two to three years seems like a stretch. Showing back, rate of profitability is probably what investors would care about.

Rohit 24:17

One more question here. “What are your thoughts on the recent 150 million dollar round that Pinterest raised in the-- I think--” Yeah, that’s a very good question. Yes, that round is not included in the chart that we had on this slide deck. This [inaudible] other people on the line. Pinterest recently announced 150 million dollars of flat round. As in the last round that they raised was more than 400 million dollars raised at about 11.5 billion dollar post-money valuation in May 2015 I believe. And since then, they hadn’t raised any money. I think 150 million dollars tells a couple of things. It’s a flat round, so it does not a down round. So there’s a sigh of relief there. And so it’s a non-negative news in my opinion. Also, the amount is a clear step down from what they raised previously. So my interpretation is, probably, this is the last kind of round before the company decides to take clear steps towards going public. Again, that’s just one interpretation. Also another one could be that the company is taking more concrete steps towards improving its economics, profitability, what have you. So there’s a clear kind of positive bias towards this funding round.

Rohit 25:57

As we wait for more questions, one more question I see on my screen over here is, “Do you think Pinterest can get to Facebook level revenue per user?” That’s a very good question. Facebook has done a very, very good job with increasing the average revenue per user over the last 4, 5, 6 years. And that’s probably kind of the goal standard out there for any company to follow. And I think the single biggest reason behind that is product innovation. As in, they have been very careful with ad load, they have been very careful with over monetizing, and the way they have kept users engaged is through improving the product. And that’s one way to replicate datas, just [inaudible] to win in that arms race of innovation, and that’s something is hard to kind of forecast. So far, Pinterest seems to have done a reasonably good job. They have increased the user base from zero to almost 200 million users over the last 4, 5, 6 years. And then they have a unique value proposition, unlike other social media platforms. The faddish element for Pinterest may not be as high, which makes it a little bit more sticky, but when we compare the monetization levels for Pinterest with other platforms, it’s just-- we do illustrate that there is potential for this company to follow the footsteps of other companies by innovating and improving the product.

Rohit 27:46

Okay. I guess, with that, I don’t see any more questions. And I’m going to wrap up here by saying thanks for everyone who joined us. We will have a recording available online as well as transcript available on request. So this is Rohit Kulkarni from SharesPost. Again, thank you so much for joining, and happy Friday, and have a great weekend. Thank you.

CONFLICTS:

This report is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with, owns and/or seeks to own positions in the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report. This report was originally prepared and distributed to institutional and certain private clients of SharesPost Financial Corporation. Recipients who are not market professional or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services. Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company. Investors should be aware that the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest any of the issuers that are discussed in the report at any given point in time. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, Investors are cautioned to consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION:

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst(s) compensation was, is, or will be, directly or indirectly, related to the specific views contained in this report. Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the grown and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER:

This report does not contain a complete analysis of every material fact regarding any issuer, industry or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable, however, we cannot guarantee the accuracy of all such information. Any securities offered are offered by SharesPost Financial Corporation. SharesPost Financial Corporation and SP Investments Management, LLC are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions. Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk and should only be considered a long-term investment.

You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. SharesPost, the SharesPost logo, My SharesPost, SharesPost Index, SharesPost Investment Management, SharesPost 100 Fund, and SharesPost 100 List are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

CONFLICTS:

This report is being published by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management, LLC., an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc. SP Investments Management, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with, owns and/or seeks to own positions in the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report. This report was originally prepared and distributed to institutional and certain private clients of SharesPost Financial Corporation. Recipients who are not market professional or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell or a solicitation of an offer to buy or sell any security and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation, do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax or transactional advisory services. Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company. Investors should be aware that the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest any of the issuers that are discussed in the report at any given point in time. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, Investors are cautioned to consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus with this and other information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.

ANALYST CERTIFICATION:

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst(s) compensation was, is, or will be, directly or indirectly, related to the specific views contained in this report. Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the grown and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER:

This report does not contain a complete analysis of every material fact regarding any issuer, industry or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable, however, we cannot guarantee the accuracy of all such information. Any securities offered are offered by SharesPost Financial Corporation. SharesPost Financial Corporation and SP Investments Management, LLC are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions. Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk and should only be considered a long-term investment.

You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice. Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment. SharesPost, the SharesPost logo, My SharesPost, SharesPost Index, SharesPost Investment Management, SharesPost 100 Fund, and SharesPost 100 List are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.