Good morning,
We are moving Pinterest (PINS) from the short bench to an active short on the Hedgeye Communications Position Monitor. We first pivoted short on PINS into Q2 earnings last quarter – and then moved it to the top of short bench post-Hedgeye sweeps and immediately got squeezed on a PYPL acquisition rumor. We wrote about in our Comms Daily Brief Note last week. A potential deal made sense in that we are seeing a convergence of social and payments, and that post-IDFA, there is more value in on-platform transactions to measure conversion. However, something didn’t smell right because the price tag of $45B was substantial relative to deteriorating fundamental trends at PINS. Also, Pinterest doesn’t have the scale and is not as bottom-of-the-funnel as most think for it to be a good deal for PYPL. There was also potential for the deal to put PINS relationship with SHOP in jeopardy.
This morning, PYPL disclosed they have no interest in acquiring Pinterset - Snapchat last week unboundedly had something to do with it. Pinterest is more performance-based and commerce-focused, lags behind on the ad-tech side, lacks scale in users/time spent, and is probably taking it on on the chin from iOS14.5 changes, supply chain/product availability issues – and they also took market share last year coming out of FB boycott. Meanwhile, the user/engagement metrics continue to look weak and we believe PINS disproportionately benefited from the DIY trends of last year. From an ad-tech perspective, we are also comparing against the launch of auto-bid rollout that boosted revenue. Meanwhile, in the constant battle for the incremental ad $$$, we suspect Pinterest is facing competitive pressure from Amazon and Google as they look to aggressively scale shoppable ad-formats (Walmart also goes live with their DSP 4Q21). Of course, Facebook also has growing ambitions in shopping with Instagram. We took a closer look at the composition of the PINS advertiser base in our internet themes presentation (See link below).
The potential offset to these headwinds is that August/September 2021 marked the first real back-to-school post-COVID, and according to our agency checks, it was modestly stronger than 2019. PINS has also re-rated significantly since Q2 earnings trading at ~7.5x '23 consensus sales estimates from a valuation perspective. However, Q4 revenue estimates look high to us, with the Factset consensus implying a $246M QoQ increase in total revenue (vs. $263M in 4Q20 and $120M in 4Q19). Note that prior to reporting 3Q21 earnings, the Factset consensus for SNAP was modeling $263M QoQ Q4/Q3 (versus $233M in 4Q20 and $115M in 4Q19), and the mid-point of SNAP's Q4 guide implies a QoQ increase of $118M. While Pinterest is still under-monetized ex-U.S, they have closed the gap significantly since going public in 2019, we believe the bulk of the weakness is coming from North America which still represents ~70% of revenue.
Meanwhile, we still face increasingly difficult comparisons through 2Q22, which include comparing against record amounts of stimulus that boosted commerce/direct-response trends. With the recent string of M&A rumors, we have to be mindful that management/board are willing sellers. However, fundamentals continue to deteriorate and growth is slowing. Therefore, it is likely potential buyers wait until the iOS 14.5 dust settles before making another offer. If we are right in our fundamental outlook, then potential buyers can probably wait a couple of quarters and get a better price.
The company is scheduled to report earnings on 11/4.
Click Here for our Q4 Internet Themes Presentation
Call or e-mail with any questions.
Best,
Andrew
