Pinterest Stock: Market And Competitive Environment (NYSE:PINS)

Today’s article aims to provide a market and competitive framework in the social network industry, focusing on Pinterest (PINS). We believe PINS is a fascinating stock in the current market environment. High-interest rate hikes expectations have punished many high growth and low profitability stocks. At the same time, many of the social media stocks have been falling together with Meta (FB) and their worsening fundamentals due to the investments in their Reality Labs. Indeed PINS 2021 was not one of their best years if we look at user growth. However, we argue that investors should not put PINS in this basket. The last year demonstrated that it can quickly increase profitability through higher revenue per user and international expansion.

Today’s article shows the first part of our research, focusing on the social media industry. In particular, we try to analyze the market and the peculiarity of the competition.

Growth

According to ResearchAndMarkets.com, in research from August 2021, the Addressable Social Networking platforms market is expected to grow between 2021 and 2026 with a CAGR of 25.38%, with a final market of $939,679B by 2026. This research considers Ask.fm, Classmates, FB, Flickr, Microsoft’s LinkedIn (MSFT), Meetup, MeetMe Inc., PINS, Tagged Inc., Tumblr Inc., Twitter (TWTR).

Another research study by IbisWorld shows that the size of the social media market in the U.S. is expected to grow by about 15.6%.

Although the U.S. market for advertising is the most profitable, it is probably one of the most mature markets, PINS is just at its beginning, as in the last year have managed to scale its ARPU in the US by more than 47%. Moreover, the international market is a second point that gives ample room for growth.

According to IAS Research, Social shopping is booming. Still, the context makes purchase intent rise and fall: 32% of respondents are likely to purchase a product or service if the ad in their social feed is contextually relevant. Nearly half (47%) of consumers say they have an unfavorable view of brands whose ads are displayed alongside unsuitable content, and 60% of consumers are unlikely to purchase a product or service advertised alongside unsafe content. Most consumers (59%) hold social media sites responsible for ads displayed next to unsafe content.

The company that is proving to attract more and more users while increasing average profitability per user is undoubtedly Tik Tok, which went from having 508 million monthly active users and $0.69 ARPU in 2019 to 1.2 billion MAUs (user CAGR of 54%) and $3.83 ARPU (revenue per user CAGR of 136%) in 2021

For the US, the company with the highest growth rate between 2019 and 2021 was Snap (SNAP) (120%), followed by Pinterest (84%); last, Meta (54%) and Twitter (20%).

However, we need to remember that these numbers are not directly comparable as each social media company defines a user differently, depending on the main feature of their social platforms.

In absolute terms, Meta remains the company that monetize its users the most in the United States with an ARPU of $214, followed by Twitter with $78.9, Snap with $31.1 and Pinterest with $22.

That shows how PINS has a considerable room to grow its ARPU compared to the other leading players in the social network space.

The very rapid growth of Tik Tok in terms of user base and average revenue per user has been mainly determined by the new type of content and their mode of “delivery” to users.

Tik Tok displays short videos with songs or sounds in the background, scrolling automatically without the need to do manual searches.

The objective of the platform is to keep users online as much as possible to increase the profitability of the content.

Meta is trying to follow in the wake of Tik Tok with content that is practically identical in structure to that of the latter (Instagram’s Reels).

The importance of Instagram as well as by its greater breadth of content types can positively impact this implementation.

We can therefore see that the growth of Tik Tok is due to the peculiar market segment and not to the size of the company (given its initial tiny size compared to competitors) or to geographical differences (given that it is a global market, whose turnover is still strongly driven by the USA and the West).

Profitability Of Social Networking Platforms

We can divide the profitability assessment into two parts:

• Gross margin,
• Operating margin.

Gross Margin

Pinterest had the highest values among the companies taken into account (from 62% in 2017, reaching 83.32% in the last quarter of 2021).

Snap followed a similar uptrend as from 18% in 2017, it reached 65% in 2021.Meta and Twitter have been more stable, settling at 83% and 67% respectively in the last quarter of 2021.

Operating Margin

Pinterest brought its operating margins from -29% in 2017 to 15% in the full year 2021, making its operations profitable.

Snap has also seen a positive trend, although it has not yet managed to overcome the BEP of that interim result (from -64% in 2019 to -17% in 2021).

The company with the highest operating margins remains Meta despite following a downward trend between 2017 and 2019 (from 50% to 41%), followed by a flattening of the curve and a value at the end of 2021 of 40%.

Twitter would seem to be on the upswing in this respect because, after a solid negative period, which resulted in the reduction of these margins from 15% (2018) to less than 1% (2020), it reported a margin of 5.4% in 2021.

Why?

Pinterest has improved its marginality thanks to the increase in the price paid by advertisers, which in turn is due to the expansion of the user base, favored by the quality as well as the range of products offered, but also by the COVID-19 pandemic that, determining a forced stay at home, has increased people’s free time, exploitable, however, only with home activities (a large part of Pinterest’s use cases consisted of such activities).

In addition, from 2017 to 2021, R&D costs compared to gross revenue dropped from 70% to 36%, while selling and administrative expenses (again compared to revenue) went from 76% to 46%.

Snap has experienced much more significant but similar changes. In contrast, Meta has seen its operating costs grow at a slightly faster rate than its turnover, resulting in a slight reduction in margins. The main reason for the increase of the expenses of the most recent years is attributable to investments in Research and Development in the Metaverse.

For Twitter, the primary determinant of the decline in gross and operating margins between 2019 and 2020 was the advertising boycott reaction of companies following the protests that erupted in the U.S. regarding the death of George Floyd and the social media’s call for more extraordinary efforts to remove racially motivated hate content. However, this trend faded as the protests subsided, and the company grew again, albeit slowly.

Investments

In the social network sector, growth is mainly linked to investments made in R&D for the formulation of new products and the implementation of new technologies (which require significant numbers of employees), in sales strategies (creation and positioning of advertising campaigns) and also in acquisitions of competitors and leading companies in the tech sector (with multiple beneficial effects such as the consequent elimination of potential, or current, threats and the increase in market share as well as the possibility of exploiting technologies that are very difficult, or impossible, to replicate or acquire separately from the company in question).

The most relevant aspects that generally determine the success of a social (in terms of the number of users and relative engagement) are in our opinion:

• the creation of a network that connects people, personally or professionally, with the fundamental characteristic of keeping users connected as much as possible, to the point of losing all sense of time;
• the intense personalization of contents, since according to statistics, about 74% of users feel annoyed when these are not relevant to their interests;
• the “infinite” scroll, since, according to scientific studies, the more times a content (which can be considered neutral) is viewed, the more it increases the probability that it is appreciated by our brain and has as a logical consequence the increase of the actual rate of personalization of the feed
• the leveraging of social issues by keeping content current and, on average, more interesting for the majority of users
• intercepting the fads of the moment.

PINS Main investments

Pinterest’s primary investments from 2019 have been in R&D and SG&A spending.

In 2019, R&D expenditures made by Pinterest increased by 380% compared to 2018, reaching a whopping $1.2 billion and then settling around $700 million on average over the next two years. These investments include new product development, innovation related to technology formulation, development processes and the process undertaken to improve the existing product line or services, and compensation in R&D actions.

Regarding sales and marketing expenses, the overall increase in 2019 compared to 2018 was 135%, followed by a momentary decrease of 28% and a subsequent increase of 45%, to reach almost $650 million in 2021 (or approximately 25% of sales). These expenses include advertising expenses, marketing fulfilment expenses and marketing stock compensation.

In 2019 operating costs have been higher connected to a Restricted Stock Unit expense connected to the IPO.

A Comparison Between The Main Social Media Players

The investment model most widely adopted by companies in this area involves allocating a significant amount of resources in:

• skilled personnel to develop managers’ vision as best and as quickly as possible;
• marketing and advertising campaigns;
• new technologies developed by innovative start-ups often acquired to internalize the team as well;
• facilities capable of supporting rapid and sudden growth (which such companies often incur).

The more users a platform has, the greater the value of the services it can offer, a consequence of two factors, the first of which is more important: a wider user base and greater diversification of users, in this case, summarized in advertising space, going to determine significant network economies for companies in this sector.

Once the point of critical mass has been passed (i.e., where the value of the service purchased exceeds its price), a twofold positive effect is obtained for the growth of companies:

• a progressive decrease in the impact of marketing costs and advertising campaigns
• an increase in bargaining power with their customers (old and new), resulting in a higher premium price on the services offered.

These effects have a positive impact on margins, and lead to a decrease in the need for investment in advertising.

Conversely, investments in new technologies, which often involve the purchase of start-ups aimed at staying up-to-date with market developments, increase the investment needs for companies in this area.

In our case, the investments made by Meta and Tik Tok in technologies in the field of VR and by Snap in AR and AI technologies denote the desire to renew a somewhat saturated market characterized by a few but strong competitors fighting for supremacy in the long term, with the intent to evolve their core business to postpone the phase of physiological decline as well as to try to acquire an ever-increasing market share.

Nevertheless, some companies like Pinterest and Twitter pursue a different strategy, more focused on exploiting current technologies and optimizing their platforms. Although the investment strategies decided by Pinterest and Twitter are pretty similar, the companies present trends concerning profitability and revenue growth that are different, leading to the conclusion that these differences are determined more by the market segment, therefore by the type of product, than by other variables, resulting in a lack of correlation between these companies and their profitability as well as growth.

Risks

The forces causing the changes in the operating numbers of social media platforms are:

• Geographical location (on which the degree of monetization of ads depends) of customer companies
• General economic trends (which, in addition to impacting on the budget that companies decide to allocate to ads, determine the customer base)
• Company policies aimed at growth and optimization (more significant investment in R&D, sales and marketing decrease margins in the short term)
• Possible lawsuits (related to the legal responsibility of the platform concerning the privacy of users and concerning the content approved for the publication of ads as well as the sale of data to third parties) and the consequent need to undertake policies to counteract the increase or continuation (which determine additional management and control costs

The capital composition in the industry is based on equity. All the considered companies in this industry hold a lot of cash on average, with little or no debt.

The best case study about a disastrous company in the industry is probably MySpace.

Founded in 2003, it represented the first modern social network, viral among young people between 16 and 25 years old, and whose spread was driven by emerging bands and singers who used it to network, upload their songs and advertise them, as well as to get in touch with fans, who had for the first time such a possibility.

Alongside the artists’ “company” profiles, there was the possibility of registering as a private user and using MySpace to share content, find new friends, chat, write personal blogs, and create events. However, it was possible to use nicknames, so it was possible to create a network of strangers instead of friends and family.

It also offered the possibility to customize your profile not only with sounds and video clips but also with HTML code. This choice turned out to be counterproductive because most users did not know how to use this code, and the customization of the code often relied on external sites that made loading profiles very slow. So the main competitor of MySpace, Facebook, was the natural destination for dissatisfied people looking for a place with similar characteristics.

The beginning of the exodus of users pushed the management to be more and more aggressive with advertising (the only source of income for the platform) to keep the company afloat, but this did not determine anything but the opposite effect.

Another of the reasons that led to the failure of MySpace is certainly the continuous redesign primarily due to the many owners who have succeeded over the years. To increase the dissent was also the policy of censorship carried out concerning inappropriate content, which came too late and to with luck of transparency.

Due to the lack of initial censorship, various cases of suicide and bullying contributed to the deterioration of the image of the social network, as well as triggering numerous lawsuits and class-actions that cost the social network significant capital losses.

Although there was no revenue to justify this decision, the creation of new offices in different countries contributed to a further dispersion of capital. After hitting a record $12 billion valuations in 2007 and taking users away from Friendster as well, MySpace began to lose appeal.

The graphical restyling attempted in 2009 made the profiles more homogeneous in terms of graphics but did not improve the platform’s usability, and, as in the case of Friendster, the company’s strategies oriented too much towards advertising (rather than the development of innovative features) accelerated its decline. It was sold off in June 2011 for $35 million to an advertising network.

In 2019, MySpace informed that “due to server relocation” all files uploaded between 2003 and 2015 to the platform “may” have been irretrievably lost.

To summarize, MySpace failed in terms of popularity (the platform still exists, although it only contains data uploaded from 2015 onwards) for four main reasons:

• the quality of the product (nicknames instead of real identities, slow loading, presence of aggressive advertising)
• the bad management (characterized by poor innovation, totally senseless choices, for the short and long term, and excessive spending)
• strong competition (the rise of Facebook)
• legal battles (related to sexual abuse, copyright violations).”

Conclusion

We analyzed the competitive framework in the social media market with a focus on Pinterest and a comparison against Facebook, Snapchat, Twitter and Tik Tok.

Pinterest is found to have an excellent business differentiation from competitors. The large niche also allows the company to stall in investments to produce new product types.

At the same time, even with stagnant user numbers in 2021, monetization of those users and profitability has been on the rise.

The great possibility of monetization growth improved profitability, together with the low need for investments and risks, are elements that allow us to provide an initial bullish assessment of the company.

In the following article, we’ll delve into Pinterest, analyzing the company’s business and future numbers in more detail.