Last month, I wrote an article on how mobile application companies hide user attrition and how Pinterest and Snap bury important key metrics in 10-Ks and S-1 filings. One thing I stated is that financials in tech companies can be misleading when not accompanied by scrutiny of the underlying business. For example, there are a couple of terms that are important to social media growth. I italicized growth because I presume investors will demand growth from Pinterest following the IPO and the nearly 50% rise in stock price we’ve seen over the last month. Interesting enough, despite the stock climbing from its initial public offering last month, analysts are expecting a first-quarter loss of 16 cents a share, adjusted, compared to a 10-cent loss in the year-ago quarter. With that said, analysts are expecting revenue of $197 million, reflecting growth of 50%, however there are discrepancies between the user base that is growing and the user base that is monetizing, which is what is causing the losses.
The key metrics to watch for Pinterest include monthly active users (MAU), daily active users (DAU) and average revenue per user (ARPU). I’ll review some information here from my last analysis before I go into why Pinterest is seeing an increase in revenue yet a slight decrease in net income.
Pinterest Struggles to Monetize International Audiences
Thus far, Pinterest has struggled to monetize global users. The difference in average revenue per user (ARPU) in the United States compared to the global users is astonishing – and uncommon for social media. We see the United States users monetize at $9 average revenue per user while the international users monetize at a mere 25 cents per user. This is what the graph looks like:
The user growth in the United States shows saturation in previous quarters with flat to declining growth between Q1 2018 to Q4 2018. This means the areas where there actually is user growth (international) does not contribute to profits as the costs of operations likely exceeds 25 cents per user annually. Facebook’s international ARPU is currently at $7 and has never been below $1.50 as a public company even with the stock struggled in 2012. Twitter has seen below $1 international ARPU as reported in 2017 but was also hovering at 5 Price to Sales during some of this time period compared to Pinterest’s 20 price to sales (more on this below).
Meanwhile, Snap which is a more direct comparable as both companies are newer to the public markets, shows nearly 1500% more ARPU in the Rest of World region. Yes, you read that right – 1500% with 9 cents from Pinterest ROW compared to $1.24 ROW.
This helps complete the issues Pinterest faces globally as the user growth is coming regions which result in losses. I believe this may be the culprit as to why Pinterest is expected to post 50% revenue growth yet slightly higher losses from -10 cents per share to -16 cents per share. You’ll see below that the United States has stagnated.
According to data from Apptopia, a provider of app intelligence that partnered with Bloomberg in February, Pinterest downloads in Brazil surpassed United States downloads for the first time on Android. This gives us an a glimpse as to where the user growth is coming from, which are regions that create a loss.
The information above means investors are doing one of the two:
- Betting the United States will monetize higher than $9 per user
- Betting the global audience will monetize higher
My best guess is that number one is likely to occur while number two will present a challenge. The issues here are surmountable and we may see some progress here in the next earnings report; however, I do not believe we will see enough from this quarter’s earnings to justify Pinterest’s stock price due to the flat United States base and the lack of revenue coming from the international base. This leads me to ask how overpriced is Pinterest?
Pinterest Trading 30-50% Too High
Pinterest’s IPO price was originally $15-$17 and went public at $19. My analysis points to this pricing being correct while the current trading price of $28.50 at time of writing is 30-50% too high due to the constraints of social media valuations.
With total revenue at $775 million in 2018 and a market cap of about $15 billion, Pinterest is at a 19.3 price to sales ratio. When adjusted for 50% revenue growth this quarter, Pinterest will have about $100 million more in revenue for the past twelve months, which puts the price to sales at 17.14 – if the price remains the same. If investors run up the price after earnings due to revenue growth, we will be right back where we were with a 19 or 20 price to sales ratio. This will be on revenue of about $197 million with 50% growth same-quarter YoY.
Meanwhile, Facebook is at 8.8 Price to Sales with 26% same-quarter YoY revenue growth at $15 billion per quarter, Twitter at 8.8 Price to Sales with 20% same-quarter YoY growth on $787 million quarterly revenue and Snap with 39% same-quarter YoY growth on $320 million quarterly revenue at 10.8 Price to Sales.
Historically, Facebook did trade at a price to sales above 15 between 2013 and 2016, however, we see that the time period when Facebook was able to command a Price to Sales above 15 was when the company had crossed 1.2 billion monthly active users and was growing towards 2 billion monthly active users. At that time, the company posted 63% YoY growth with $1.5B to $3.0B in profits. With this user base, Facebook is an outlier. Pinterest is a better comparable to Twitter and Snap with all three social media companies having users in the 270-325 million monthly active user range, with Pinterest being the smaller user base of all three.
Twitter’s price to sales history has also been at a high price to sales ratio over 15 when posting over 75% growth (Pinterest is expecting growth at 50%). Even with solid growth, Twitter’s Price to Sales did not last long at the 15-20 range and the price was down nearly 50% within two quarters. The second time Twitter tried to get above 10 price to sales in early 2018, the price again corrected the following quarter to below 10 price to sales.
Snap has met a similar fate of having a short-lived price to sales above 15 before correcting to 10 or below where it has been for the last few quarters. Again, the correction in price to sales happened despite Snap reporting 50% YoY quarterly growth.
Takeaway: Do you remember Twitter at $50? Snap at $20? Pinterest at $28-$30 is kinda like that. Social media companies with a 10 or higher price to sales ratio have not fared well in the immediate quarters that followed with both Twitter and Snap seeing their value cut in half when reaching the price to sales where Pinterest is at today.
The market has created a valuation that will be hard for Pinterest to live up to. Pinterest priced correctly at the IPO as I believe the price should be in the $15-$19 range as this would be in the reasonable 8-10 price to sales range. Even if Pinterest beats expectations and we see a bump up in price, I stand by my analysis that the stock’s price to sales is 30%-50% too high – and the valuation will be short-lived.
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