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Morningstar | PINS Updated Star Rating from 17 May 2019

Pinterest reported mixed first-quarter results, as the firm beat our internal projections and consensus on the top line but missed slightly on the bottom line. We were pleased with a continuing increase in Pinterest’s monthly active user count, along with further monetization of those users, which support our assumption of a network effect moat source for the company. First-quarter numbers also displayed Pinterest’s progress toward profitability, which we still expect will happen in 2021. Management’s 2019 revenue guidance was a bit below our projection, and while we adjusted our estimates accordingly, we plan to maintain our $22 per share fair value estimate on the firm. We continue to believe that while Pinterest is not a Google or Facebook, it is well positioned to benefit from continuing growth in the online advertising space. International markets, such as Europe, also represent attractive growth opportunities for the firm. Pinterest had a successful IPO--the stock had jumped more than 62% from its IPO price and was trading in 2-star territory. While the stock is down more than 15% in after-hours and is approaching the 3-star trading level, this narrow-moat name remains overvalued.

Total revenue grew 54% from last year to $202 million, driven by higher monthly active users, or MAUs, and growth in average revenue generated per user, or ARPU. Pinterest ended the quarter with 291 million MAUs, up 10% and 22%, sequentially and year over year. U.S. MAUs accounted for 85 million of the total user count, up 6% from last year. However, such growth was much lower than the 12.7% that Pinterest posted in the first quarter last year. It appears that Pinterest’s efforts to further expand internationally are paying off, as the international MAU count was up 30% from last year to 206 million.

We were impressed with the firm’s ability to monetize its U.S. and international users, which we think is indicative of not only more ad inventory being sold, but also of more advertisers jumping onto the platform. Total ARPU was up 26% year over year to $0.73, which consisted of $2.25 ARPU in the U.S. and $0.08 internationally, up 42% and 60%, respectively.

While around 93% of total revenue was from the U.S., we believe growth opportunities remain in the market, as Pinterest can further monetize its U.S. users via increasing ad loads (which resemble native ads), and adding more advertisers not only from the current verticals in which it has gained traction (CPG and retail), but also from verticals such as travel and automobiles. Plus, as the firm more aggressively increases its salesforce, expansion in additional international markets is likely to further drive top-line growth. According to management, Pinterest is actively selling its ads to advertisers in 13 international markets, up from seven last year. We also continue to believe that further adoption of video content on the platform will bring on board higher demand for higher-priced video ads from advertisers, which will further push revenue in all markets higher.

On the expense front, it appears the firm is progressing toward creating operating leverage and profitability, which we continue to expect in 2021. Pinterest posted improvements in gross margin and had lower R&D and sales and marketing as a percentage of revenue, compared with last year.

While the stock is currently overvalued, we remain confident in Pinterest’s ability to gain further traction in the growing digital advertising market. We expect Pinterest to increase its global digital ad spending market share to 1%-2% in 10 years from what we estimate was only 0.3% in 2018. Pinterest's more innovative features such as Product Pins, Shop the Look, and visual search tool Lens have attracted retailers and direct-to-consumer brands to purchase ads on the platform and should continue to do so, in our view. And while the firm is expanding its sales team to more effectively penetrate the international markets, we believe its investments in more self-service tools for advertisers will bear fruit in the U.S. market by next year. In addition, we think the impact of the expected slowdown in MAU growth (mainly in the U.S.) will be more than offset by the firm’s strong monetization of the users. Given that most Pinterest users access the app with the intention of finding various products or ideas, which could result in high ad conversion rates for Pinterest and advertisers, monetization of pinners is likely to outpace user growth in the long run.