Image Source: Pinterest Inc – Fourth Quarter of 2019 Earnings IR Presentation
By Callum Turcan
Social media firm Pinterest Inc (PINS) published an operational and financial update after the market close April 7 that caught a lot of investor’s eyes. Pinterest reported that its user base, measured by monthly active users (‘MAUs’), had continued to grow sequentially in the first quarter of 2020 on both a domestic and international basis. While the ongoing coronavirus (‘COVID-19’) pandemic has likely negatively impacted its digital advertising business, Pinterest is communicating to investors that over the longer term, its social media offering is growing in popularity which supports growth down the road.
Financial and Operational Update
During the final three months of 2019, Pinterest had 88 million MAUs in the US and an additional 247 million MAUs internationally, up from 82 million and 184 million, respectively, in the year-ago period. In Pinterest’s early April update, the firm noted its US user base had grown to 89-90 million MAUs while its international MAUs had grown to 276-277 million in the first quarter of 2020, representing very strong sequential growth. This is largely why shares of PINS surged higher following the report, in our view, as a growing number of individuals and households have turned to social media sites while “cocooning” at home to comply with “stay-at-home” orders.
Image Shown: Pinterest’s MAUs are trending upwards both domestically and internationally. Image Source: Pinterest Inc – Fourth Quarter of 2019 Earnings IR Presentation
Pinterest withdrew its full-year guidance for 2019 in light of the pandemic making it very hard to predict its future financial performance (from its press release):
Pinterest is withdrawing the revenue and adjusted EBITDA margin guidance for full year 2020 that it initially issued on February 6, 2020. In light of the rapidly evolving and unpredictable effects of COVID-19, Pinterest is currently not in a position to forecast the expected impact of COVID-19 on its financial and operating results for the remainder of 2020. As the COVID-19 pandemic has continued to unfold, it has impacted Pinterest’s advertising revenue globally.
The firm did provide an update on its expected first quarter of 2020 performance, and its balance sheet (from its press release):
Based on information available to it through the date of this statement, Pinterest preliminarily expects revenue for the quarter ended March 31, 2020 in the range of $269 million to $272 million. For the quarter ended March 31, 2020, it also expects global monthly active users in the range of 365 million to 367 million, with 89 million to 90 million in the U.S. and 276 million to 277 million internationally. Pinterest ended the first quarter with a strong balance sheet, with approximately $1.7 billion in cash, cash equivalents and marketable securities on March 31, 2020, no financial debt, and an undrawn $500 million revolving credit facility.
Please note that this implies a year-over-year revenue growth rate of 34% in the first quarter of 2020, and while a slower rate of growth than in the first quarter of 2019 (when sales grew by 54% year-over-year), that’s still quite strong top-line growth. Pivoting to its balance sheet, Pinterest exited 2019 with $1.7 billion in cash, cash equivalents, and marketable securities combined (the firm also has a small amount of restricted cash on hand), along with no debt on the books. It appears Pinterest continued to retain a pristine balance sheet by the end of the first quarter of 2020, which we appreciate. While Pinterest was not free cash flow positive in 2018 and 2019, its negative free cash flows have historically been manageable given its large net cash position (Pinterest’s negative free cash flows came in below $0.05 billion last year).
Bigger Picture
Pinterest is aiming to grow its top line by strong double-digits over time to enable the firm to realize economies of scale and ultimately profits (and positive free cash flows). In 2019, Pinterest generated over $1.1 billion in GAAP revenues (up 51% from 2018 levels) and spent over $2.5 billion on its total cost and expenses (up three-fold from 2018 levels). A lot of that was due to surging R&D expenses, keeping in mind the R&D tax credit in the US was made permanent in 2015, and Pinterest reported GAAP net losses in both 2018 and 2019. Pinterest is clearly investing heavily in growing its business, which has prevented the firm from being profitable.
Last year, Pinterest launched its social media site in 21 new international advertising markets and posted very strong average revenue per user (‘ARPU’) growth. Internationally, Pinterest’s APRU surged 115% year-over-year in 2019, hitting $0.54 in 2019. Domestically, Pinterest’s APRU grew by 34% year-over-year to $12.07 in 2019. Due to its international user base growing much faster than its domestic user base, Pinterest’s ‘Global’ ARPU grew by 21% year-over-year to $3.81. Pinterest’s key figures are moving in the right direction.
Image Shown: Pinterest’s ARPU has been trending in the right direction over the past several quarters, with the fourth quarter representing a big period for digital advertisers. Image Source: Pinterest Inc – Fourth Quarter of 2019 Earnings IR Presentation
In the medium term, Pinterest will need to lean on its pristine balance sheet and large net cash position to ride out the storm. The impact the pandemic will have on its digital advertising business and thus Pinterest’s financial performance is hard to quantify, but the firm’s revenues will likely take a large hit in the short-term until things start to stabilize on the macro level. Having a net cash balance is how firms can best position themselves to ride out exogenous shocks, including unexpected events such as COVID-19.
We continue to really like Alphabet Inc (GOOG) (GOOGL) and Facebook Inc (FB) in our Best Ideas Newsletter portfolio given both firms carry large net cash positions and are incredibly free cash flow positive. Alphabet exited 2019 with a lot of cash on hand and a relatively tiny debt load, while Facebook exited 2019 with no debt on the books and plenty of cash on hand. Alphabet and Facebook are the two giants in the global digital advertising business and will likely see their revenues take a hit in the short term; however, their long-term free cash flow growth trajectories remain very much intact.
Concluding Thoughts
Pinterest has a strong balance sheet, but the company may have to consider cutting some of its expenses depending on how things pan out. For now, while its revenues will take a hit due to many firms scaling back their digital advertising spend, Pinterest’s longer term growth runway is improving as its user base continues to grow. Domestic MAUs are more lucrative than international MAUs; however, over time strong ARPU growth at its international division will help support Pinterest’s profitability levels. With that in mind, we caution Pinterest’s hefty operating costs will become a major drain on its resources if its revenues stay subdued for a prolonged period of time.
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Related: PINS, SOCL
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Callum Turcan does not own shares in any of the securities mentioned above. Oracle Corporation (ORCL) is included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares and Facebook Inc (FB) are both included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.