EUR 850.00 For Business Accounts Only

Morningstar | Launching Coverage of Pinterest with Narrow Economic Moat, Stable Moat Trend and a $22 FVE

We are initiating coverage of Pinterest with a narrow moat rating and a fair value estimate of $22 per share, or a $15 billion market capitalization based on our estimated share count. Pinterest is becoming a public company as it will sell 75 million shares at an IPO price of $19 per share according to The Wall Street Journal. The IPO price, which is above the range that the firm was seeking, represents a $13 billion market capitalization, slightly higher than Pinterest’s last post-funding valuation. While this price is at a 14% discount to our fair value estimate, we recommend a slightly wider margin of safety before investing in this very high uncertainty name.

Pinterest, an online product and idea discovery company is focused on carving out a pieced of the global digital advertising space. While we don't expect Pinterest to displace online advertising behemoths Google and Facebook or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending which we estimate is an addressable market of nearly $500 billion.

We rate Pinterest as having a narrow economic moat and stable moat trend based on the network effect and intangible asset (data) moat sources, which we think can drive the company to profitability and excess returns on invested capital in the future. With more than 250 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the firm can attract more online ad dollars. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel--from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the firm to gradually increase its share of the U.S. digital advertising market, after which, as its international users (mainly in Europe) increase, it will attract more ad dollars for that audience.

As a platform for content sharing, Pinterest is susceptible to blame for spreading misinformation via pins. Additionally, by having an international audience, Pinterest is subject to Europe's General Data Protection Regulation. Still, there has been little public outcry based on how Pinterest uses pinners' data and whom this may be shared with.

We view Pinterest as a narrow-moat firm and believe it has displayed a network effect among its users and has begun to compile valuable intangible assets, or user data, both of which we think it can effectively monetize and generate return on invested capital for at least 10 years.

Indications of the network effect and intangible asset economic moat sources include Pinterest's user growth (although we expect such growth to decelerate) and increase in average revenue generated per user through advertising. We think these trends will continue, which will lead to operating leverage, future profitability, and excess return on invested capital over time. In our view, while Pinterest's user count is not as impressive as that of Facebook or Instagram, the understanding that it is not just another online social platform, it is not a similar passive medium, and its users come on the platform with the purpose of finding ideas or products will help the firm attract ad dollars.