Pinterest Inc. (PINS)

Early in the third quarter we used earnings related weakness to increase our position in Pinterest. Pinterest is an online discovery platform where 416 million high commercial intent users go to be inspired in their search for projects and products. These 416 million high commercial intent users have undefined wants that they are unable to express in text format. In seeking product and brand agnostic visual discovery these users are offering up a blank slate for merchants and brands to inspire and influence their purchasing decisions. This blank slate is offered up over long engagement periods in which the consumer is an aspirational, positive emotional state. In an age of constant digital distraction and escalating divisiveness, a growing ecosystem providing 416 million monthly active users prolonged positive engagement while they perform product and brand agnostic searches is extremely valuable. With any investment that we make, we look for multiple ways to win. In Pinterest, we see four.


First, Pinterest is enabling ecommerce on the platform by addressing the biggest pain point of its 416M users; an inability to easily purchase the products they discover on the platform. The first step in addressing this pain point is to grow the amount of buyable inventory. A recently launched catalogue uploader provides the self-service mechanism for merchants and brands to scale their products on top of Pinterest’s established infrastructure. Pinterest’s computer vision and machine learning tools then link the 240 billion user defined images on the 5 billion user curated Pinterest pages to the uploaded shoppable products. In doing so, this enables users to shop from their searches and from their saved boards.


Second, by enabling the full funnel user experience from inspiration to planning to purchase, Pinterest turns the flywheel to pull in brand and merchant advertisers. As merchants and brands see the organic traffic that Pinterest drives, they seek to increase their spend on shoppable advertisements. To support this, Pinterest is rolling out measurement and analytical tools that scale advertising on the platform. Self-service analytical tools that provide automated targeting and attribution to merchants and brands provide enhanced visibility on the return on investment on advertising spending on Pinterest. As Pinterest advertisement management tools and APIs integrate into merchant, brand, and advertising agency workflow, spend on the platform grows. Unlike other social media and engagement platforms, on Pinterest, users view shopping as a top priority. With shopping as a top user priority, Pinterest is perhaps the only platform where relevant ads add to the user experience. As long as ads continue to remain relevant and inventories match user needs, advertisements on Pinterest’s platform could theoretically be 100% of the content on the platform, and these ads would still be additive to the user experience. With Pinterest advertising market share representing only 0.7% of US digital adverting spend and 0.03% of international digital ad spend, and with the digital advertising market growing at a mid-teen annual growth rate as it takes share from print advertising , we see a long runway for Pinterest to gain market share in this growing market.


Third, as Pinterest broadens the advertiser base both the scalable infrastructure and the dynamics of the advertising auction marketplace support top line growth at high incremental margins. Operating leverage inherent in the business model comes from a cost of sales tied to the number of users and the depth of their engagement. As merchants and brand advertisers layer marketing spend on top of Pinterest’s scalable infrastructure, the incremental margin largely accrues to Pinterest’s bottom line. The dynamics of the advertising market contribute meaningfully to this scalable operating leverage. Currently, every advertisement on the Pinterest platform is executed on the minimum bid. As the numbers of advertisers and the number of advertisements on the platform grow, advertisements are executed at the price the auction market determines for access to Pinterest’s 416 million high commercial intent users. As fair market prices are established, Pinterest’s ARPU scales to significantly more than the current $3.59 global ARPU, and much closer to the $29.78 global ARPU of Facebook.


Fourth, Pinterest is in the early innings of expanding its presence internationally. Currently, 321 million of the 416 million users are internationally based, and these users are growing 49% year over year. As international users continue to grow, Pinterest is rolling out the aforementioned playbook to make the international platforms more shoppable, with scaled advertising primitives that enable the full Pinterest ecosystem. The international audience has significant monetization potential from its current monetization gap of 21x ($0.58 vs $12.39 in the US) as international monetization grows to a 5x gap at scale.


In Pinterest we see an extremely valuable e-commerce and engagement ecosystem that is vastly under monetized. With these four steps, we see a path to meaningful shareholder value creation in the coming years.