Pinterest Q1 2023 – Lip Service

Bill Ready looks out of his depth.

• The outlook for this company now completely depends on cost-cutting as OPEX remains ridiculously bloated and I have serious concerns that Bill Ready has the stomach for this kind of pain as he appears to be focused on nothing but growth.
• To make matters worse, I get the impression that the company is merely paying lip service to the cost-cutting theme and would much rather continue to focus on revenue growth and running the company for the benefit of its employees rather than shareholders.
• Pinterest reported good results on the top line but despite apparently laying off 5% of its workforce, expenses continued to climb as a percentage of revenue further deepening the value destruction for shareholders.
• The shares responded with a 16% decline followed by another 4% decline the following day which, in my experience, is a really bad sign as it means long-term holders are throwing in the towel.
• All the revenue metrics continue to go in the right direction with revenue of $603m (up 5% YoY and just ahead of consensus) and MaUs of 463m up 7% YoY.
• However, non-GAAP costs as a percentage of sales are a horror story with COGS up 300bp YoY, R&D up 300bp YoY, sales and marketing up 200% YoY and G&A up 100bp YoY.
• Total non-GAAP costs are now 97% of revenues when its peer group is strongly indicating that with costs correctly sized, this could be a mighty cash generation machine.
• This gives the impression that the company is merely buying growth rather than sweating its assets in the most efficient way possible.
• I continue to think that the Pinterest asset has excellent revenue generation potential as it is still under-monetising its users compared to the peer group and its users are of exactly the right type.
• A significant percentage of the user base are women who have spending characteristics that are particularly well suited for the service that Pinterest provides and often come to the platform with intent which should be highly monetisable.
• Here Bill Ready is doing fine but where it really matters, the management bench looks to be weak.
• The example of Twitter and Meta Platforms indicate that the social media companies are hugely overstaffed and that these platforms could continue to function just fine with a 40% or more reduction in head count.
• Bill Ready came from Google and PayPal where his focus has been on growing users and monetisation, but nowhere does it appear that he has had to go in and make hard choices when it comes to reducing cost and running a business efficiently.
• The one hope shareholders have is in the recruitment of a new CFO as the current CFO (Todd Morgenfeld previously VP Finance at Twitter) is transitioning out of the company and is expected to leave in July this year.
• The new CFO needs to be a ruthless cost-cutter who is given carte blanche by Mr Ready to right-size the business.
• Should this come to pass, then I can see a scenario where the company begins to live up to its potential, but given Mr Ready’s focus on growth only, I am not confident that an individual of this nature will pass the interview process.
• The company managed to generate cash during the quarter thanks to a $200m reduction in accounts receivable but I am far from certain that this is repeatable in Q2 2023.
• Furthermore, nearly half of that $200m was consumed with $92m worth of shares being repurchased as a result of the release of restricted stock units which looks like the company buying back shares from employees.
• Share repurchases in the market which benefit investors directly were much smaller at $69m.
• The company now has an enterprise value of $12.2bn which puts it on 4.1x 2023 revenues which is too high for a company that is growing single-digit and persistently loses money.
• However, if the company were to cut 40% of its OPEX, this would translate into EPS of $1.36 in 2023 or a PER of 16.2x.
• Given the future monetisation potential (which Mr Ready should be quite good at), I would consider paying this for the shares.
• All of this depends on the recruitment of the right CFO which I think is probably the single most important event that will determine the direction of the shares for the next couple of years.
• This is still one to watch but the time is not yet right to do anything else.