Editor's Note: This is an unlocked institutional note published on 11/01/19. If you are interested in access to our institutional calls and research email firstname.lastname@example.org
Below is a 5-minute video recap on PINS Q3 earnings
Pinterest (PINS) reported better than expected 3Q19 results across most key metrics (see below). The problem, however, is with management's updated FY19 revenue guidance of $1,100M - $1,115M (previously $1,095M - $1,115M). Consensus estimates* were at $1,119M heading into the print, and we were expecting FY19 revenue between $1,125M - $1,135M. Assuming the international segment continues its recent trend of outperformance, the guidance implies a significant deceleration in domestic ARPU growth in Q4.
Management attributes the slowdown to difficult comparisons as they launched new ad formats and optimization products in 2H18 that scaled very quickly. However, growth from shoppable pins and small- and medium-sized advertisers, combined with wallet-share gains and shift to digital, should be enough to sustain domestic ARPU growth > 20% YoY through 2020.
Ultimately, after stress testing our assumptions, we don't believe the growth deceleration implied in management's guidance. If it does occur, then the monetization challenges in the U.S. are greater than we thought, and we will be wrong.
However, we have been here before. Management gave disappointing 2019 guidance in May that caused the stock to drop 35% over the following five trading days. We stuck with the long then, because the assumptions embedded in the guide looked unreasonable and they beat-and-raised the next quarter.
While painful, we are sticking with the long as we expect 2019 revenue and adjusted EBITDA comes in near $1,125M and $30.5M, respectively.
KEY METRICS RECAP
- Domestic revenue $254M HRM vs. $252M consensus ($251M Actual)
- Intl. revenue $29M HRM vs. $24M consensus ($28M Actual)
- Domestic MAUs 88M HRM vs. 87M consensus (87M Actual)
- Intl. MAUs 227M HRM vs. 223M consensus (235M Actual)
- Domestic ARPU $2.94 HRM vs. $2.90 consensus ($2.93 Actual)
- Intl. ARPU $0.13 HRM vs. $0.10 consensus ($0.13 Actual)
- Adjusted EBITDA ($10.8M) vs. ($22M) consensus (+$3.9M Actual)
stress testing the model
Domestic ARPU sensitivity assumes the following for 4Q19:
- Intl. ARPU of $0.19
- Intl. MAUs of 248M (same QoQ # increase as 4Q18)
- Domestic MAUs of 89M
To get to the high end of 2019 revenue guidance of $1,115M:
- Domestic ARPU must slow to 17% YoY in 4Q19, bringing the 2-year growth rate to 30.5% (a decline of 830bps QoQ).
To get to the low end of 2019 revenue guidance of $1,100M:
- Domestic ARPU must slow to 12% YoY in 4Q19, bringing the 2-year growth rate to 27.4% (a decline of 1140bps QOQ).
Domestic ARPU grew 26% YoY in 3Q19 off the most difficult comparison of the year of 53% YoY (3Q18). In 4Q19, the growth comparison eases to 46% YoY. Therefore, we have a hard time modeling such a rapid sequential deceleration in the YoY growth rate unless there is something more sinister at play. We are modeling domestic ARPU growth of 22.5% YoY in 4Q19.
We recently spoke with two U.S. advertising agencies who collectively manage $1.5B in ad-spend across 40 clients. Both agencies indicated they were increasing their spend with Pinterest between 20-30% YoY.
While we understand that valuation doesn't matter in the short-term for a growth company that misses expectations (especially in Quad 4), we can't ignore that PINS is trading back near the $19/share level where shares initially priced in April 2019. Additionally, at $20/share, PINS is trading at a more reasonable 6.0x EV/Sales (on 2021 estimates) relative to peers. In 2021, PINS is still growing 2x that of TWTR, which is trading at 4.5x EV/Sales and slightly faster than SNAP, which is trading at 6.5x EV/Sales (PINS is more profitable). We believe PINS should trade a premium to SNAP and TWTR if we are right in the fundamental trajectory. That said, we are without a fundamental catalyst until Q4 earnings in 2020.
Andrew Freedman, CFA