Pinterest – Best of a bad bunch.

Much less likely to get into trouble.

• Pinterest is in a much better position than either Uber or Lyft as its financials are in much better shape and it not engaged in a bloody price war to try and dominate the market.
• Demand for Pinterest has been soft, to say the least, as its IPO is now being offered at a valuation of $10.6bn some 14% below its last round of private financing in 2017.
• The main reason for this is that user growth in 2018 has not been what was promised despite the fact that revenues have grown at a very healthy clip at 59% YoY.
• MaUs at the end of 2018 were 265m, up just 11% YoY with international users growing much faster than those in the USA.
• This is where the growth questions begin to emerge because in Q4 2018, revenue per USA user was $3.16 while revenue per international user was a paltry $0.09.
• Looking at RFM’s digital ecosystem monetisation benchmarks, one would conclude that Pinterest’s ability to monetise its users is fairly limited given its narrow focus in terms of the service that it offers.
• Hence, I would expect that revenue per user in the USA will soon flatten off leading to a much more pedestrian growth picture going forward.
• Growth will also be increasingly diluted by the greater contribution to the user base from countries outside of the USA which generate a tiny fraction of the revenue per user.
• However, the good news is that I think that Pinterest is in a much better position financially than either Uber, Lyft or anyone else who is engaged in a bloody cutthroat war for market dominance.
• Pinterest’s gross margins were 68% in 2018 and the company reported EBIT margins of 16% in Q2 2018.
• The Q4 18 profit was caused by seasonality of digital advertising revenues, but it demonstrates that while growth may slow there is a good ability to generate profit and cash flow.
• Pinterest has no real direct competitor, but it does compete somewhat with Facebook for time spent and engagement.
• The net result is that as growth slows, Pinterest should become nicely profitable with good cash flow generation.
• I do struggle with the valuation at some 13x sales but if I had to back one of these current big-ticket IPOs, it would be this one.
• Lyft is already fulfilling my fears and I think that Uber will not be far behind it.