Pinterest – The LINE effect.

Pinterest is back where it started.

• Pinterest has exactly the same problem that plagued both LINE and KakaoTalk in that users in the home country are very productive but overseas they are virtually worthless.
• This became clear in Pinterest’s Q3 19 results which missed expectations as the home market is slowing and international is not taking over the mantle of growth.
• The net result was a 20% collapse in the share price to $20.1, very close to the level at which it went public earlier this year.
• Q3 19 revenues / EPS were $279.7m / LOSS $0.23 compared to consensus of $282.1m / LOSS $0.22 which is not a cause for concern.
• This is especially the case as the company is broadly cash neutral meaning that it is non-cash stock-based compensation that pushes it into the red.
• This combined with the fact that it has no direct competition and has $2bn in the bank means that this company is a proper going concern.
• Hence, the argument should be based on what growth and profit can it generate in the long-term and how much is that worth?
• This is where the problems emerge because the market has clearly been led to believe that revenue from US users would continue to grow very quickly but there are real signs of maturation.
• Ironically, it was around these sorts of levels that both LINE and KakaoTalk began to flatten out in terms of their ability to sell stickers and games to Japanese and Korean users of their instant message platforms.
• The real opportunity for long-term growth at Pinterest is the international user which currently generates $0.13 per user per month compared to $2.93 generated by US users.
• The net result is that there are 87m users in the US (27% of the total) that generate 90% of the company’s revenues.
• Google & Facebook show similar skews but not nearly as pronounced as this as their services have proven to be far more pervasive overseas.
• Again, from a company perspective, this is not a huge problem because the company could stop here, turn a profit and survive very comfortably.
• The problem is the valuation of the shares which has a problem if the US market is now saturating.
• The company now has a market cap of just over $10bn and will generate revenues of $1.8bn for the whole of 2019.
• If growth is going to slow markedly, this amounts to an EV / Sales of around 4x which raises questions.
• There is still growth in the US but less than the market was hoping for, but I think that the correction in the share price looks about right.
• Consequently, I do not expect a further big sell-off in the shares and there may be considerable support around these levels.
• There is nothing wrong with Pinterest as a company, it is just the market that became over-zealous in what it thought Pinterest could realistically achieve in the short to medium term.
• I do not have a strong view on this one either way as I think the market is now accurately reflecting reality.