The hidden growth story of this technology stock

Pinterest (NYSE:PINS) is a technology and social media platform best described as a “visual discovery” search engine. It lets users ‘pin’ or bookmark ideas they like; everything from recipes to outfits and home décor. With ~400 million active users, it is the third-largest social networking platform in the U.S. 

In this wire, Thomas Davies of VGI Partners explores three key elements fuelling the strength of the company’s network effects, which make it attractive for businesses to place sponsored content in users’ feeds, similar to Facebook. 

Davies explains the biggest opportunity for Pinterest lies in the fact that its international average revenue per user (ARPU) is only 50 cents, compared to $12 in America. With Pinterest’s strategy shifting from user experience to monetisation, Davies sees enormous profit growth on the horizon as the company expands its sales force, boosts ARPU and grows in other markets.

Transcript

I'm sure most people are familiar with the platform, but it's essentially a digital pin board. And once we started digging into the business, we found it's got very strong network effects and that's because of content discovery. So the more people who use it, the better the content discovery becomes for the incremental user, and then also because of the amount of content that's on the platform. Over the past 10 years, the 400 million users have pinned 200 billion pieces of content to the platform, so that gives them a very wide moat and that moat has actually been tested. We've had Amazon, Facebook, and Google launch competitive products and none of them have managed to get any traction. So we think that the moat is wide, it's getting wider and it's been tested.

In terms of the opportunity for Pinterest as we see it today, we think they are at the very early stages of monetisation. Pinterest has been around for 10 years. The first seven years of that was really focused on the user interface and improving the user experience. Then over the last three years they've actually changed that focus and they've become far more focused on monetisation, but they're still at the very early stages. So they're building out a tech stack, which is very important, and they're also scaling up their sales force. And we're seeing quite significant and rapid changes in both of those aspects.

Where we, in particular, see an opportunity is in the international markets. In the US today, the average revenue per user is $12. Internationally, that's 50 cents. A key driver of that is the sales force - and they haven't built out the international sales force to the same degree as the US. They've only got 70 people globally (ex US) and all of those people are in Western Europe. So what we're going to see over the next few years is that as they go into new markets and add head count into their sales team, we think the average revenue per user will start to converge towards the US (which is obviously a moving target that will move up at the same time). And we think that there's going to be a lot of revenue growth as a result of that.

Later on this year they're moving into Latin America. Then after that they're moving into Asia, so we should see some pretty quick progression here we think. In terms of the business model, obviously with models like this, there's a lot of operating leverage. So as incremental revenue comes onto the platform, that mostly drops through to earnings. So we think that the quality of the Pinterest business model is underappreciated and also the earnings growth potential over the next couple of years is underappreciated.

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VGI Partners is a high conviction global equity manager, focussing on businesses with secular growth, attractive industry structures and where they believe they possess insights not appreciated by the wider investment industry. For further information, please use the contact form below.