THE HEDGEYE EDGE
Pinterest (PINS) kicked off their IPO roadshow recently after filing an amended S-1 that set a price range of $15 - $17/share.
We added PINS as a top long idea into the IPO with a base case valuation of $23-$25/share and bull case valuation of $34-$36/share based on the company's relative growth rate. While the stock has been volatile, it remains well above where it priced at $19/share.
There is a lot we like about the company and its fundamentals. We like that PINS is in the very early stages of monetizing their 265 million MAUs (184M Intl / 82M U.S.), especially in international markets where ARPU averaged a paltry $0.06 per quarter in 2018.
We like that PINS value proposition to advertisers is based on conversion over reach, with more than 50% of users coming to the platform with the intent to find or shop for products. Our preliminary checks with agencies and CPG companies have come back mostly positive and in support of the ROI narrative and increased ad-spend on both a net new and same-store basis.
From a user perspective, such high commercial intent means that ads are a natural part of the user experience, unlike social media platforms where ads are incidental. Meanwhile, management has avoided the 'growth at all cost' mentality in favor of a more disciplined and measured approach, a style better suited for a public company in our opinion. This difference in philosophy has manifested itself in part through improved profitability and scale, with the company on track to achieve full-year adjusted EBITDA profitability in 2019, based on our model.
Management's 2019 revenue guidance of $1,055 - $1,080 million brackets the consensus estimate of $1,070 million heading into the print. The guidance represents growth of 40% - 43% and a deceleration from 54% and 60% revenue growth in 1Q19 and 2018, respectively. We were expecting revenue growth closer to 45-50% in 2019 as promoted pin launches in 6 additional countries in Europe should yield accelerating international ARPU growth. After spending more time with the model, we are still comfortable with our assumptions around international monetization trends. International ARPU of $0.08 came in $0.01 higher than what we were modeling and growth accelerated to +59% YoY. Meanwhile, the growth comparisons get significantly easier for the remainder of 2019, with management suggesting an accelerating trend on the earnings call.
However, if our assessment of guidance proves to be wrong, then it is likely because our domestic ARPU growth assumptions are too high. We were modeling domestic ARPU growth of 35% in 2019, while the growth rate embedded in the guidance is between 25-30%. With the number of advertisers on PINS accelerating, revenue from new video formats growing 3x, and domestic ARPU posting growth of 41% YoY in 1Q19, we have a hard time modeling such a significant deceleration in domestic ARPU growth for the remainder of 2019. Even if we assume PINS domestic ARPU growth slows to 20% by 4Q19 (down from 46% in 4Q18), we still get to the high-end of management's revenue guidance for 2019.
On the profitability front, management guided to an adjusted EBITDA loss of $70-$45 million, with the mid-point equating to a margin of approximately -5.5% (range -7% to -4%) and unchanged compared to -5.2% in 2018. With 1Q19 adjusted EBITDA margin of -19% improving significantly from -35% in 1Q18, the guidance implies a steep ramp in expenses for the remainder of the year. We were expecting the trend in margin improvement to continue in 2019, but it appears management was holding back on investment ahead of the IPO and now plans to invest heavily in building out the salesforce and platform. The CFO commented briefly on the call that "...we're going to be making a lot of investments to build out that sales force", with material financial results to accrue in 2020.
While we are disappointed with the guidance, we still believe a path to breakeven exists in 2019 if we are right about revenue upside, and see a significant improvement in margins in 2020.
We are sticking with the long as 2019 guidance looks conservative and our thesis remains in-tact.