Pinterest's IPO Filing Features More Positives Than Negatives - Tech Check

Back in December, I argued that Pinterest looked well-positioned to achieve the $12 billion-plus IPO valuation it was reported to be seeking. On the whole, the image-sharing platform’s S-1 filing, which arrived on Friday, does more to support that view than to call it into question.

Here’s a look at positive disclosures found within Pinterest’s S-1.

  1. Revenue growth remains strong — Pinterest’s revenue rose 60% in 2018 to $755.9 million. And in seasonally strong Q4, revenue was up 58% annually to $273.2 million.
  2. Revenue still has a lot of room to grow, particularly overseas — Though nearly 70% of Pinterest’s monthly active users (MAUs) are now located outside of the U.S., the company produced only $17 million in international revenue in Q4. And even in the U.S, the company’s Q4 average revenue per monthly active user (ARPU) was a modest $3.16. For comparison, Facebook (FB) produced $34.09 in ad revenue per North American MAU in Q4. Though it’s unrealistic to expect Pinterest’s U.S. ARPU to ever match Facebook’s, given differences in things like advertising scale and time spent per user, getting even a third of the way there would be huge.
  3. International MAUs are still growing strongly — Pinterest’s total MAUs rose 23% annually in Q4 to 265 million. Driving most of this growth: International MAUs rose 32% to 184 million.
  4. Cloud hosting expenses are reasonable — Though Pinterest is still in the relatively early stages of monetizing its platform and relies on Amazon Web Services (AWS) rather than its own servers to host its platform, the company’s cost of revenue was only equal to 32% of revenue in 2018, down from 38% in 2017. For comparison, Snap (SNAP) , which also relies on cloud infrastructure providers and has to handle a lot more video content than Pinterest, saw its cost of revenue equal 67% of revenue in 2018.
  5. There’s a clear path to profitability — Pinterest posted a GAAP net loss of $63 million in 2018, down from $130 million in 2017. And with the help of seasonal strength, the company reported a $47 million net profit for Q4. Assuming Pinterest can keep delivering healthy revenue growth, it should be able to report positive annual profits soon.
  6. Pinterest’s search and e-commerce exposure work in its favor — As Alphabet/Google (GOOGL) will vouch, search remains unmatched when it comes to delivering ads related to what someone is interested in buying at a particular moment. And Pinterest disclosed in its S-1 that it’s now seeing over 2 billion monthly searches. The company also noted that 97% of its 1,000 most popular searches are unbranded, which potentially makes them appealing to brand advertisers looking to reach consumers who are undecided about which firm’s products to buy. Separately, a recent Cowen survey found that 48% of U.S. Pinterest users said they use Pinterest to find and shop for products; that compares with just 14% for Facebook proper, 10% for Instagram and 7% for Twitter (TWTR) .

There were admittedly a few things shared within Pinterest’s S-1 that are worthy of concern. Specifically:

  1. U.S. MAU growth has slowed — U.S. MAUs were up by only 6 million annually in Q4 to 82 million. Unless Pinterest, which says that two-thirds of its global MAUs are female, figures out how to appeal to a larger base of U.S. consumers, most of its future U.S. revenue growth will be driven by better monetizing its existing users rather than winning over new ones.
  2. No daily active user (DAU) figure was shared — Pinterest declines to share how many DAUs it has; the most it will do is say that 57% of MAUs visited Pinterest on a weekly basis as of the end of 2018. Moreover, the company says it doesn’t anticipate “that most of our users will become daily active users.”
  3. Sales and marketing spend is still growing rapidly — Pinterest’s sales and marketing spend rose 60% in 2018 to $259.9 million, leading it to equal 34% of revenue for the second year in a row in spite of strong revenue growth. And with the company having barely begun to flesh out its international ad business, it wouldn’t be surprising to see sales and marketing spend continue growing rapidly in the near-term.

Overall, however, the positives clearly outweigh the negatives here. Given Pinterest’s revenue growth, MAU growth, cost structure and long-term monetization potential, the company shouldn’t have much trouble getting an IPO valuation above $12 billion. And if Pinterest doesn’t immediately begin trading at sky-high multiples on its first day, its stock could represent an intriguing play on the growth of online advertising, social sharing and e-commerce.

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