Chit Chat Stocks - Pinterest Revisited (PINS) | Not So Deep Dive

Episode Date: May 17, 2022

Pinterest operates a visual discovery engine. The company's platform allows users to find inspiration for many things in their lives. Some of the most popular topics include recipes, home design, and DIY projects. Listen closely as Ian, Brett, and Ryan go through the history, financials, and future prospects of Pinterest. Enjoy the show! This episode is sponsored by Commonstock, a social network for smart money investors. Check-out the platform here: https://commonstock.com/ Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Interested in more of Ian's work? Follow him on Twitter: https://twitter.com/IanGrayLive  Contact us: [e-mail] Timestamps Company Background | (4:02) Industry | (9:30) Management & Ownership | (12:33) Valuation | (16:09) Earnings | (17:41) Balance Sheet | (21:50) Our Analysis | (22:30) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not So Deep Dive episode on Chit Chat Money. This is a show where we cover the basics of a stock for 30 to 45 minutes. I want to be clear who should be

listening to this show. If you know this company already, and this is why you're clicking on it, you probably should not be listening because we're going through the basics. And if you already understand it fully, this is not going to add anything extra. But if you don't know the company or any of its financials or how the business actually works, then this is the perfect show for you to introduce it and kind of decide whether you want to research further on your own. The reason we say that is because we've gotten some flack in the past that our work wasn't in depth enough on companies that we're looking at for the first time. Pinterest, which we're talking about today, is a bit of a different one because this is revisited. So we've looked at the

company before. We're doing a revisit to see if maybe we're a little more interested, but typically it's us turning over the rock for the first time, first time looking at a business. Yeah. So I just want anyone listening to understand that so you don't waste your time. All right. Today we're talking Pinterest. It was Ryan's choice, but I'm sure we've all heard of it before. We covered them a year ago. And the reason we're revisiting them is because their stock, like a lot of NASDAQ stocks, have gone in the tank. But I don't know, Ian, you're joining us today? Any, I don't know, any thoughts, first thoughts on Pinterest from as we're leading to the show? Um, yeah, well, I would say generally I like the business. I've not, as a shareholder,

I've not liked the returns over the past, uh, year or so, but, um, I think it's, I think it's one of the, um, maybe this is an overstatement, but I think it's one of the most interesting businesses, um, out there right now, just in terms of, uh, the type of service it provides. And I don't know. I'm excited to talk about it today. All right. Yeah, it should be a fun one. We're going to introduce the company again. But first, let's talk about our sponsor today. And that is Common Stock. Today's episode is brought to you by Common Stock, a social network for smart money investors. We posted on there before. I got to say, listeners, hold us to it.

We need to post on there more because it is a great place to communicate freely. well, you can communicate freely in a lot of places, but communicate without the risk of a lot of the trolls that may be out there on Twitter or something like that, where you actually get a genuine conversation pushback. It's not just all sunshine and rainbows. You might get someone critical. It's more like, say, if you've been on Value Investors Club, it can be a bit like that, but a lot more robust. For investing, I think it's a lot more thought provoking. Yeah. So, common stock really is the home for people that know what they're talking about when they're investing their money. And it's a community of experienced traders and

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The link will be in the show notes if you don't know what it is. Great website. And I believe they have an application as well to check out. Ryan, do you want to introduce Pinterest and any updates, I guess, on the business, although it seems about the same as where we last checked, right? Yeah, it is very similar. And the last time we looked at Pinterest was April 15th, 2021. So a little over a year ago, we looked at them. So I'm going to, I've put a few of the old notes into the sheet so we can kind of glance back and see what we were thinking then versus now. So we'll kind of talk about that. But from the last time we discussed them, I wrote, So Pinterest is a social discovery app that helps people, known as pinners, find inspiration.

The way it works, you set up an account like any social media app, then you use the search bar as a discovery tool, or you can post pins. You can also create boards, which are kind of like file folders full of different pins. It's really a platform designed for discovery. So the typical search, it's category-based searches. So, let's say I wanted to look up home decor ideas or apartment decor, something like that. You can get a lot of inspiration for how you should maybe arrange it. Beach house or something. Yeah, beach house.

The offerings go everywhere. It could be men's, women's fashion. I think 70% of the people on Pinterest are female users. So, it's more catered towards that audience. But Pinterest today pretty much still serves the same exact function as it did a year ago. It hasn't changed too much, although there's stuff in the works that we're about to talk about that could potentially change it. But they generate revenue in basically the same three or four ways. And the first one is ads.

And they actually break out their own ad inventory into performance-based ad slots and brand ad slots, which I find kind of interesting. And they look like a typical organic pin. So a lot like any other one, but they're paid. And then the brand ads pay per impression and the performance ads pay for typically like conversions. There's different prices. Someone promoting their own pin, right? Or am I wrong on that? What is performance?

Performance. I believe it's the pricing is different and what you are paying for is different. So performance, maybe you just want to promote like maybe Lululemon just wants to promote their brand. That could be a brand ad, whereas maybe another company is looking for conversions or impressions. Lululemon might have been a bad example for the brand ads, but think a Coca-Cola ad, you're basically just trying to get your brand out there as opposed to other ads or maybe more direct. You're looking for transactions on that one. So they break up the two ad slots and you can pay different pricing for each one.

The second way they make money is through, let's say there's a merchant on Pinterest or they have a page on Pinterest. and you end up buying something from the merchant and you get there through Pinterest, they get a referral fee essentially for that kind of a commission. But by and large, most of the revenue comes from advertising. Is that like the Shopify partnerships, stuff like that, that they're connecting it through their whatever shopping API? So I think the partner referral fees are actually segmented differently. um so some have their own custom websites where it's just a merchant referral and then there's

some where the shopify themselves i believe pays the referral so because that's being transacted through shopify which is a benefit for them but either way both those are still small relative to the advertising business a little bit about the history though pinterest was officially founded in 2010 by Ben Silberman, Evan Sharp, and Paul Ciara. Silberman, who is kind of known, I guess, as the main founder, attended Yale University, worked at Google in its online advertising division immediately after attending Yale. And apparently he wanted to build something of his own and his girlfriend encouraged him to quit Google and leave. And him and Paul Ciara, who was a college friend, started something called Cold Brew Labs, which was basically just an app

development company. And their initial product was a shopping comparison app named Tote. So you could browse apparel and goods from 30 different retailers in a single app. The app ultimately failed, but they learned that a lot of people came to the app simply just to discover new ideas. And then they would send themselves the shirts they liked or the clothes they liked. They'd send themselves pictures of it. So that really provoked the idea that maybe there should be an app based around just discovering new items. And so that kind of was the birth idea of Pinterest. And then Paul and Ben quickly came up with a functioning beta, but they had to bring in Evan Sharp, who was apparently responsible for writing most of the code as sort of a third co-founder.

And he really fine-tuned the app. And then later in 2010, they officially launched the Pinterest app. It was invite only to start, but they really took off pretty quickly. They've since obviously had a of success more than 400 million users on the platform now uh and they ipo'd in 2019 so they've been public for i believe three years yep and they were one of the hottest startups in silicon valley i think yeah they're in silicon valley in like 2015 people are calling it the next facebook all that sort of good stuff they're saying it's going to be better bigger than twitter and snap um they haven't really like fulfilled that as much but they've grown quite a bit during that time all the industry and competition. This one's not, I think, as important except maybe the overall

digital ad industry numbers. But, you know, Pinterest is in kind of its own unique niche where they're competing in social media a bit, you know, for time spent on stuff like that. But they're also not a traditional social media site. So I wouldn't say they're competing with Facebook. They're probably competing with Instagram. And now they're increasingly with their video push increased and competing with TikTok. But I mean, they're not competing with Twitter, like some of the other messaging stuff they're definitely not competing with. But another industry they're really in is that kind of thing that people used to do at the mall or I don't even know what else, where else you had to get that. Maybe just from regular old TV

commercials, finding inspiration for things to buy and do. That's kind of the industry they're in. I know that's a weird industry to describe, but that's really what they're in. The business model is though similar to social media so it's largely advertising like ryan mentioned digital advertising is a large market but the size is and uh oh i said disrupted here i meant disputed depending on what research you look at so it's the one i said last time i don't know it said it was like 300 billion dollars but statista says 566 billion dollars in spend in 2022. my bet right now would be on the lower end giving how the economy is doing but that is supposed to grow to 700 billion dollars in digital advertising spent by 2025 and that is in us dollars globally a little side note

here if there is actually 700 billion dollars in spending in 2025 on digital advertising i the market's an incredible bargain right now but that's another whole discussion and then competitors i think i said this last time but what do you guys anything changed there i mean instagram seems number one well no i would say tick tock is number one now that they've named basically highlighted them by name in their earnings release. They say they're losing users and time spent on the app because of a certain video competitor. Yeah, but Instagram is also a big video competitor too.

I would say it's still Instagram. I mean, their new initiative with video definitely is coming after the TikTok. They basically copied that product, right? I mean, they basically literally just said TikTok is stealing user time from them. I know, but yeah, but that's on the edge. i think on the whole it's still instagram's kind of i don't know any any thoughts yeah i would say

that instagram i think is probably the biggest competitor still just because of how similar some of what they're trying to do is and especially with some shopping features but that i think in terms of like compared to last year i think tiktok has had the biggest like negative impact on uh on pinterest in the last year just because of how much it's grown and how much time it's stolen kind of like you were saying brett that i think i think tiktok has been the biggest problem for them but it's not necessarily um the biggest competitor if that makes sense okay and let's move on to management and ownership i don't think i don't competition with this stuff is hard to describe so i don't think we need to go through any specific ones like uh management ownership

though what are your thoughts on them ian and i guess kind of any info on what they own yep ben silverman as ryan was saying is the ceo and was one of the co-founders he owns about six percent of the shares outstanding so still a pretty pretty healthy stake in the company he's known um for being fairly uh he's not real showy you know there's like some of these other social media founders who you see in the news more often or who do like some weird stuff or you know whatever he's he seems to fly fairly under the radar from what i've seen um one of the other co-founders evan sharp left in 2021 to join to join uh former apple uh i think he was apple's design chief joni ives design firm and evan's still on the board and an advisor to pinterest

um he doesn't own a ton of stock but he left around the time of the paypal acquisition rumors um when they were being discussed and so there was some speculation that him and silverman may have had a disagreement about whether to be acquired or man that they could look at the price now that could have been a nice exit yeah so who that's and that's all speculation but it just it did happen around the same time and so people were kind of curious about that um paul siara who was one of the other founders that ryan was mentioning he holds about six percent of shares he left the company in 2012 and so he hasn't really been um an active part of the company for quite a while but he still is one of the major shareholders so that's something to keep in mind

and then maybe the most important thing actually about management and ownership is they have a dual share class structure, which basically gives increased voting rights to the people with the B shares, which is basically all of the insiders. And so both Ben Silverman and Paul Ciara have over 30% of the voting power. I think Ben Silverman was about 37%. Paul was about 32% of the voting power. And so if you're investing in Pinterest, especially, you know, given some of acquisition rumors recently. A lot of that decision is going to be made by a couple of people, basically. Ben Silverman and Paul Steyer are going to have a big say in anything that gets voted on by shareholders. Yeah, Paul. And Paul's not even associated with, well,

it isn't even worth it. That's kind of an interesting situation. I saw in the great write-up from, well, they're always great write-ups from mostly borrowed ideas of that premium service. If you're an analyst or a firm, definitely check that out. But there was some anecdotes from stories about how Silverman may be not open to advice from anyone, because I think someone was a new executive or someone was in a board meeting. And then he asked Ben afterwards, and this is all he said, she said, but they asked him like, Hey, the board didn't ask you any questions. Like, that's weird. Usually they kind of, it's a discussion. And then Silverman said, well, that's because I chose them. So that's not a good sign to me. That was a bit of a red

flag seeing that sort of that anecdotal evidence there from his type of mindset as an executive. Again, I didn't hear him say that. That's someone else saying it. But there's also been stuff about workplace harassment and shortchanging executives. A lot of women executives got way worse stock option. And that's saying something at Pinterest stock option stuff is quite lucrative, but they got a lot worse uh packages compared to the male counterparts in the same roles so i don't know some stuff that you want with management but again like what you mentioned the most important thing is probably that ownership structure plural site a tech workforce development company provides the solutions high performing engineering teams need to tackle today's biggest challenges whether it's

building the skills individuals and teams need to tackle mission critical projects driving cloud transformation or helping software teams to ship reliable scalable and secure code harness the collective power of hindsight foresight and insight with plural site at pluralsite.com slash vision all of devaluation last time we looked and this might shock some people given where the market is now the price to sales in what was it right in april 2021 yeah april 2021 price to sales was 26.6. Price to gross profit was 36.4. Market cap right now, if we're going to go to the real numbers, is 12.5 billion, tickers P-I-N-S, pretty easy one. And then I'm going to do this a little differently now because I'm going to assume

the 50 million in diluted securities plus the 25 million in new RSUs granted eventually get exercise the market cap is actually 14 billion dollars yes ryan yes i would mention the uh as a reminder go go through the price of sales today and the price of gross profit so that people don't forget what the other one is patience i'll get to it all right we got to get through the first numbers here enterprise value today uh if you include those dilutive securities is around 11.3 billion dollars so they have a lot of cash and i'm sure you'll get to that stuff on the the balance sheet. Enterprise value to sales today is 4.24. So a lot cheaper than it used to be. Enterprise value to gross profit is 5.3. As you can see, high margins there. And then

enterprise value to operating income is 28.7. So still pretty expensive operating income multiple, but they're reinvesting a lot through the income statement right now. And like we probably will talk about near to the end of the show, they are doing a lot of headcount growth. So Ryan, want to move into earnings? Yeah, I'm going to go through it one more time, just in case people forgot what it was when we first visited Pinterest. Price to sales was 26.6. Today, it's an EV to sales of 4.24. So huge drop. And then the gross profit multiple is kind of trended pretty much in line with that. But digging into the earnings, this is basically all the earnings that we talked about last time were pretty much a year ago. So the year-over-year

comps are pretty good for anyone that's trying to reference the old show. So the first quarter revenue was $575 million. That's up 18% from a year ago and the last time we visited them. The first quarter monthly active users were $433 million. That's down 9%. And then the average revenue per user in total, because they segmented to the Americas and then international, was $1.33 versus $1.04 last year. Then operating income was negative 3.7 million. That actually improved from negative 23 million last year. The free cashflow margin has compressed. So last year, it was 55.5%. This most recent quarter was 35.9%. And then here is, I guess, a bit of a concern for me. First of all, I'll just kind of give my take on it. I'm not that concerned about the user

decline because they're really at pretty much scale already. I mean, 400 million users is still a lot, 433. Should we talk about the rebuttal? Finish your point first. But they spent $174 million on sales and marketing this quarter. That's 33% more than they did a year ago and saw the user decline. So I'm curious. I know a lot of that's probably payroll related headcount, but they're spending a ton on marketing and not really reaping the rewards. Yeah. 33% S&M spend, sorry, S&M growth versus 18% revenue growth. Usually that's not a good sign. Here's the question I want to ask on the users though. I think we could hit it now. How is, how good, how important is an MAU to them? Like an MAU is someone that during the last month visited the website. Like that's not the same as a Facebook MAU, a Twitter MAU. Right. And I think they're way worth way, way less than a lot of the other. platforms and they know it but i'm just that i think people should take that into account with arpu stuff yeah i think it would be and this is kind of just subjective but i think it would be

a very small fraction of the time spent on the app versus some of those comps so twitter tiktok instagram you're not spending i think you're not spending nearly as much time on pinterest well at least daily have they given out daily or any of some dad and have they given out daily do know you follow them closer i don't think i don't think they've given out daily at least not in a long time if they ever did um but the thing that i think you have to weigh when you're looking at pinterest is and the pinterest monthly active users is like ryan was saying it's going to have a lower at least one would expect much lower um time spent on the app but also a higher intentionality of time spent on the app for advertisers and so it's kind of yet to be like

the people who are, what I mean by that is the people who are going to Pinterest are generally looking for ideas and ideas of things to buy, whether it's for their house, whether it's beauty products, whether it's, um, salon appointments, whether, um, it's cooking ideas and recipes so that they would need to buy, uh, food or different types of, uh, cooking instruments and equipment. So anyways, there's all sorts of things when you're going to the app because you need an idea for something um and so it should so that should benefit the average revenue per user but then like you were saying because they're spending less time on the app that should be detrimental to average revenue per user so you've kind of got to figure out where that balance is um and where

pinterest ultimately comes out on that yeah if they're only spending 30 minutes on it a week but they end up buying a 600 kayak that's still quite valuable yeah right balance you in this is really easy one. Yeah. This is maybe the cleanest balance sheet we've looked at. Cash of $2.7 billion and no debt on the balance sheet. They've got about $200 million in leases, if you include that, but a lot of cash. And I think part of that makes me a little bit less concerned about the sales and marketing expense outpacing revenue. Like you said, that's never a great sign, but right now they've got a lot of cash and they're cashflow positive. And so it's there's not a whole lot that they have to do with that should they be buying back stock

i don't know that's a tough question to spring yeah let's talk about i don't think so okay but let's talk about that later okay it's for you credentials to advance confidence to stand out in your career at regent university you'll join more than 30 000 world changers making a difference in high demand fields pursue your bachelor's master's or doctorate online or on campus in Virginia Beach. Your degree from top-ranked Regent University is waiting. So is the world you will elevate. Say yes to your purpose and position yourself for

a brighter future. Visit regent.edu slash learn more. regent.edu slash learn more. All right, anecdotal evidence. Ian. I use it occasionally for some stuff. I've worked on some projects with people. It's generally other people

that I use it with. It kind of works well sometimes to share ideas and to find to create a board that multiple people can use to uh like i was working on this movie project one time people were putting in kind of different design things that they wanted the look and feel the movie to be like so those are the places where it's been um where i've used it the most i think it's a good experience it just isn't something i tend to use very much in my day-to-day life right and that's kind of where everyone gets feels uh that a lot of people are in the

same boat and that's the big worry all right ryan any uh probably the same as last time right Yeah, similar. I mean, I used it this morning because I was researching the app. I wanted to see if there was any differences. Feels largely the same. I have used it for inspiration for different things at different points in the past. So I remember in high school one time I asked somebody to a dance and I wanted to find creative ways to do that. I looked up how to do that on Pinterest, but I've never transacted on there. And I've never, there have been times when I've kind of window shopped on there where I go, all right, that's sort of an interesting, whether that's like a shirt or something I like, clothes, apparel, I'll take it. It inspires me. And then I'll go off the app and potentially purchase something. Yeah, it's one of the big conundrums I'm sure we're going to talk about during this future growth opportunity section, but I have nothing, never used it. Um, I tried to see, tweet some out, see if anyone had any thoughts, but FinTwit is not much help.

I don't think that's their core audience. Um, so I don't know, I'm a bit in the dark on how the app feels or the website, but let's move to future growth opportunities. Ian, what do you have? I'm going to just say shopping generally. I think that's the big wild card with Pinterest is if they can capture more of the dollars and get like transaction fees on the shopping that's taking place and to capture more of that on the Pinterest platform

rather than just rely on advertising revenue, I think that that is the major growth opportunity for them. They say that monthly shoppers spend about two times more on Pinterest than they do on rival platforms. And I think the other piece of this is that APIs are going to be important. There's so much work that's already been done. for people like for retailers they already have all their setups like there's a lot of people who aren't going to want to go in and manually add pinterest as an option and so if they can build

apis that are really seamless where it's easy for me to just turn on you know the pinterest shopping link and i don't have to like go and put all my information into pinterest it just pulls it from whatever i'm already selling through whether it's shopify or something else then I think this is, has a higher chance of success. The harder it is for people to set up accounts on, you know, they're set up shopping on Pinterest rather than through Etsy or Shopify or wherever else they're selling. I think the harder it will be, but it seems like Pinterest is well aware of that and is trying to,

trying to focus on APIs that make that simple and easy, easy to integrate. Do you think shopping, okay. Do you think they should try to make the, say, a retailer's homepage or even a small business retailer's homepage, more like an Amazon store, not look like an Amazon store, but more of like, okay, this is their homepage or whatever. This is their store. It's got a layout and kind of, because it feels like people don't really, like Ryan mentioned, they don't think about the transaction on Pinterest. So, do you think they should try to push towards that? Well, that tails right into my future growth

opportunity, which is your shop. So, here's what they said about it in their letter, and it's currently in beta um they said it's a customized shopping page powered by our taste driven algorithm informed by pinners unique preferences and style so it's a curated list of things for pinners to buy essentially trying to be i would think like the digital mall um they said they continue to also test out their in-house checkout experience they i don't think they've rolled it out yet from what i can see i was that's amazing how how have they not done that i tried to buy something and it said basically visit the site and so like it was like an in-app url popped up that redirected me to another site if if they can get that and okay i was i thought you might say

that how have they not rolled out the checkout experience it's very important that they get it right yeah how hard is it you got 3 000 employees you want it to be as seamless as possible copy someone else just copy someone else i think it's in i think it's in beta right now is what i was reading and so there's a few retailers that i think are using it but it's not widespread look i just look though that's a concern for me is this their product rollout pace like you look at tiktok bigger company probably more employees but they're running at a sprint speed and pinterest product rollout seem to be on a leisurely jog they're just like oh we'll get to it eventually and tick tock season or lunch. Yeah. Yeah. I will say that Pinterest tends to

be fairly following this company for a couple of years. It tends to be fairly methodical to say the least and product rollouts. Um, they don't rush into anything and they seem to do, and I think this is both a, uh, pro and a con, but they don't change up the site very much, right? The experience stays pretty similar, which is good for people who, you know, you don't like, it's not like the snapchat thing where they change up the interface and everybody hates the app for you know a couple of months or whatever they keep it fairly similar but then they um the pace of rollouts is is pretty slow compared to some of the other competitors that's another snap yes snaps pace of product rollouts well some of them been hated are a lot quicker than pinterest i guess it

is a give and take but hey if pinterest wants uh i wants me to hire me and give me uh have me give them ideas of products they've already thought about two years ago. I guess your shop, you know, I can give you that idea already, but that seems like, yeah, huge, huge for them. I'll go to something that they've been highlighting and that is short form video content. People might be rolling their eyes. That seems like every company is trying to get into that. YouTube, TikTok, whoever. They're making a lot of investments here. They're even paying people to post or pinners to post. I don't know. Is there a difference between the people that are posting a lot and the people that are just visiting

are they all pinners? I think the posters and the pinners. I think a pinner can be a poster. Okay. To be clear. But I there are less posters than pinners. Okay. All right. All right. I think it could be both, right? I'm confused.

I'm confused. Like you can make your own board but you can also post your own pins. Okay. I'm not really a fan of the nomenclature but the it Yeah. It's, you don't have to pick one. It's not like Etsy or something where you have to be either a shopper or

seller. Yeah. So they're going into video. They're seeing TikTok or whatever and Instagram and now YouTube's been into it too. Video, you know, video idea pins, I guess you're going quickly, but I said they grew 15 X in Q1 year over year. I don't know what the growth means. I think that just means views most likely or number of ones made. It seems like it'd be a good fit on the platform giving it's already visual.

But I get a little bit concerned Because they're competing with the big dogs Instagram, YouTube, and TikTok On their core competencies If you're going to look up a product review Wouldn't you go to YouTube? If you're someone like me

And if that's not Instagram You might go to Instagram to look for it TikTok, it'll feed it to you Does that I don't know, does this stuff work? You want them to innovate on product faster But when they roll it out Well, innovate on Shopify.

No, I mean, I just think this one is just going to be a tough, tough market to crack. I think it's just a good adjacency to have as a part of your searches. Yeah, but they're paying a lot of creators to do it. Like, is the return on that going to be worth it? I don't know. They're just competing against the huge. It seems like they're fourth in line here. Maybe even fifth.

Well, Snap's different, I guess. I'm not opposed to it. I think it's a good addition to the platform. Yeah, it's fine. It's fine, yeah. All right, highlights and highlights, Ian. Highlights, I think I'll start with one of the, I think, most interesting things about Pinterest is that it's one of only a handful

of social media platforms at scale. And so you've got Pinterest, Facebook, Instagram, Twitter, Reddit, Snapchat, LinkedIn. Discord. What do you call it? What do you call it? Discord social media? More like a messaging communities on there, but, but it's,

it's under 10 probably at least in the, in the Western world, not including some of the international ones, but, but you know, it's, it's only, there's only a handful of those out there. And so I think that gives them a lot of optionality, honestly, there's kind of different direction when you got, you know, that many people on your platform, I think it's almost 350 million now or something total. Let me, I'm going to find that number to make sure, but, um, you know, that, you know, that makes a big,

um, that's a big asset, right. To have that many people who actually go to your site every month, it was 433 million, uh, worldwide in the last year. And so it's, it's a major platform. Um, the other, another highlight for me is that just the cash balance, they have rock solid balance sheet, lots of cash, and they're cashflow positive. And so we were talking about whether they should buy back stock or not. I'm kind of of the opinion that I don't think the stock is at a place where it's like dirt cheap. Like I tend to prefer stock buybacks when it's like, oh, this is yielding, you know, this is at an 8% free cashflow yield or a 9% free cashflow yield. And, you know, we don't have anywhere else to invest and maybe they don't have anywhere else

to invest their cash, but it feels like whether that I would prefer them to use that cash to, um, maybe roll out features faster, right. Hire some more people or, um, or make some sort of strategic acquisition. I think I would be, um, happy with some of those types of moves rather than buying back stock at this stage. But, uh, you know, and the other thing honestly would be just actually roll back. This is going to be one of my low lights is, um, stock-based compensation. and I'll let you guys talk about it because I know you guys are going to touch on it too. But I think honestly, I'd rather them just spend the cash on employees, not give out as much stock and then not buy back stock. I don't always love it when you're doing all these stock options and

then also buying back stock. It just feels inefficient to me. So that's one of my low lights. And then the other low light was also one of my highlights, which is optionality. Optionality is great, but it also means that you haven't figured out what your mature business is going to look like. And so I think that's the big question with Pinterest is where does this business end up? What do margins look like at scale? What is that? What is even what's the business model five years from now? Um, is it advertising based? Is it transaction fee based? What's, what does it look like? I think is still up in the air. And so just that uncertainty is a little bit of a low light as well. Yeah. And Instagram seems to have found

so many better profitable products i don't know ryan i like the fact that they're increasing their revenue on a per user basis and overall um and i think they have pretty much reached scale as you know alluded alluded to and they have they've really nailed the inspiration part it's like the thing you don't know how to search that's the that's what you're on pinterest for And so they do a really good job of that. My lowlights, however, I just don't think, I question their ability to monetize the platform in any like really meaningful way.

Similar to Twitter, you kind of in the same boat there? Yeah, yeah, yeah. You can make that comparison. It's maybe for different reasons, but I'm just not that, i don't think social commerce is going to work that well in the west like in this that's basically the play is that there's going to be transactions being done in the app and that becomes a more fruitful place to advertise and then you also get the transaction volume which you can have

take right on but i i just think it's like two separate actions you you have the the the inspiration and then you have the direct shopping at least here in the west i know it's apparently different in China, but I haven't really seen that change. Yeah. The habit of Western shoppers is not to do that. So they've got to break that habit, which will be tough. So don't like that. And then anytime you're paying, we're all going to talk about this, but anytime you're paying employees with a bunch of stock and then your stock drops 80%, they're not going to be happy when they get issued the same amount of shares next year for the bonus. So then they just did 25 million more RSUs in April.

Exactly. So it's that, that there's a huge momentum component involved with that. I think employee retention is going to be a problem over the next year or so for, for a lot of tech companies. Yeah. Good thing about Pinterest is they have that $2.7 billion in cash, but like Ian said, he kind of, his complaint was, well, let's use it to retain these employees instead of using the stock. Anything else, Ryan? No, that's it.

Okay. My highlights. The one thing that keeps me attracted to Pinterest is that they are providing, Ian alluded to this at the beginning of the show, they're providing a lot more value than they're taking right now. But like Ryan mentioned, how are they going to capture that value? And the core product seems, it seems slightly differentiated, like pretty hard to replicate. I don't think a direct competitor could really disrupt them. And there is still a lot of potential with these shopping things. But keyword is potential. And then there's also a lot of potential for advertising, just bringing that core product into Europe and other wealthy international markets.

It seems like the ARPU should get close to the U.S. ARPU or at least close the gap over time, which is if you look at their going to their shareholder letters and look at those numbers, it is quite different, more than you would think. low lights i don't think the maus are really as valuable i would love to see bau or wau weekly active user numbers or time spent on the app that would maybe mitigate some of my concerns like you guys have talked about they have a stock-based compensation disease no need to go into more of that and then looking at the income statement they're hiring on a headcount we mentioned before sales and marketing spend is growing faster than revenue at their current certain at their current gross to pro excuse me current ev to gross profit number i'm having a hard time seeing where 20 operating margins come from um given that their revenue growth has slowed

down what are you guys thoughts on that like the margins i don't know it makes me a little bit nervous well if the stock comp were a cash expense which it could i don't know you could almost call at that at this level oh man what was their free cash flow margin was super high last year right and it looks high 55 percent in q1 last year it was 36 percent this year but that's so over the last 12 months it's uh around 25 okay and most of that's sbc and um yeah their operating margin looks a lot lower yeah they are generating the cash but yeah i don't think all of it is sbc but good chunk right good chunk yeah yeah i think in the last 12 months it was about a 75 percent if i'm remembering right 60 to 70 percent was uh their operating cash

yes okay all right well that's a little light there i just don't know what margins are going to be like okay uh ian what do you think has to happen here to go right i think you guys are going to provide some good numbers so i'm not going to muddy the waters too much with my own But I will say that if average revenue per user growth continues growing at over 20% CAGR globally for an extended period of time, I think there's a path to good returns here. But I think that's what it depends on. Are you, you're a shareholder, so I've been asking these questions. Are you watching like headcount, like their growth of their headcount? When I say headcount, I just mean number of employees.

Right. I think it's not something I watch closely. I'm not too worried about that in the longterm because they've got plenty of cash to pay for those expenses now. And I think the much more important thing is revenue growth right now, especially it's, it's revenue growth in the short term. And then I think they'll, they can right size eventually if they need to. Ryan, what's your bull case?

So if they like, like Ian alluded to, I am just putting some numbers in perspective here. So, if they don't grow users and they double their average revenue per user over, let's say, the next five years, and they keep their free cash flow margins at about 25%, that would mean $1.3 billion in annual free cash flow. Right now, they have $12 billion, I think $12 billion market cap. If they double ARPU, there's plenty of upside. Yeah, I should reference again in case people didn't hear, $11.3 billion EV, enterprise value. Yeah, that would be a good return. I think the keys to doing that, they have to make the shopping experience truly seamless and keep everything in-house. So if you can convert users into transactors, there's a good chance this will be a good investment. Yep. And what Ryan's mentioning there is global ARPU. So US ARPU may not have as much to grow since they really, again, another, I'm going to make this complaint again. They haven't brought their advertising technology or even the advertising marketplace or whatever you want to call it outside the US.

they didn't do it very quickly, which is just confounding to me. But if they can execute on that and close the gap on that and double global ARPU, that equates to about $5 billion in annual revenue in 2026. I'm saying they can do this over about five years and that the current enterprise value, which I'm already including shared dilution here, is $11.3 billion. The market would probably value this decently higher if they can show that path to operating leverage. But you're making a lot of assumptions here. And I think that probably leads into the bear cases. So Ian, what do you think could go wrong with a Pinterest investment at these levels? Yeah, I think what can go wrong is the ARPU flatlines. And when you pair that with stagnant user growth, the valuation takes

a significant hit, right? Even today, when valued on free cash flow, it's still not cheap. And when valued on, at least compared to the general market, it's not cheap compared to the market. And if you take out stock-based compensation, it looks even more expensive compared to the general market. And so I think if ARPU were to flatline, the valuation would take a further hit from here, at which point shareholders would be clamoring more and more for a takeout, I think. yeah i wonder man we don't have the numbers but i wonder about that paypal takeout number was it's got to be a lot higher than it is and the market cap is now do you remember you were charlotte was it was that like 80 a share okay and what is it right what is it right now 20 uh

i think the microsoft's microsoft had a proposed offer back in like february of 2021 i think that was the rumor was that it was like 80 a share and then paypal i think was rumored to be somewhere around $60 or $65 a share, if I'm remembering correct. They let Ballmer back in the building? What is that? What's going on there? Yeah, and it's at $20 a share right now. So, yikes.

All right, Ryan. I think if they keep spending a ton, or they increase their spend on sales and marketing and they're getting declining users, it's going to be an uphill battle for them to fight. Probably not going to generate enough cash to create good returns. I think we've seen cashflow margins compressed

over the last year. even though i think arpu growth can uh is is going to be sort of the big metric to follow if you keep having declining users um and you're spending more on sales and marketing that's a terrible recipe they need to right size users yeah hopefully soon they they said this year but you're betting on or rein in their sales and marketing expenses like what are you spending on I don't know. I don't know. If they're spending that much and they're only falling 9%, that's really concerning because it makes me feel like it's a very fragile user base.

You have to keep getting back. That is a good point. That is a good point. All right. I'll go to my bear case, and that is users continue to decline. And then digital ads also can end up being cyclical. They haven't gone through a real true down business cycle. so the next few years if that occurs i'm not saying it will we'll see what happens uh this

will affect google and facebook more but pinterest is still a part of that um and then the big product initiatives don't get enough traction where the return on invested capital and in this case the invested capital is the headcount growth uh is not high enough where if they're gonna they've been saying this and the reason i've talked about this a couple times that they mentioned that we're gonna create keep growing headcount like that's a big thing we're building out our teams we're building out our teams. You got to see the revenue growth there. And if you don't, you're not going to make any money in the stock. All right. More or less interested. Well, Ian, we started with you. You're a stockholder. So I guess you are more interested, but I sum it up. Why?

Yeah, I think I'm actually going to say one of the things I think that I was wrong about in the last year, which is kind of looking back over my models. I had projected higher ARPU growth over past year and would have expected that they would have been at higher levels and that would have carried the revenue growth to a better rate. And part of the reason I was wrong about that is I thought that they were going to roll out this native checkout faster and shopping on the platform faster and that some of that would have been implemented quicker. I think that remains to me the big question is when does that actually hit the platform? And when it does hit the platform, doesn't make a meaningful difference. If it doesn't, um, I probably reevaluate my

stake in this position. My, this position has always been kind of, uh, uh, I've always looked at this seeing shopping on the platform being the major growth driver going forward. And, um, I think that that is the key to my thesis and it's still, it's just taken longer to play out than I would have anticipated. And, uh, that's the big question for me going forward is, is it going to play out at all did you uh when you're kind of making your projections do you think users would decline or did you model in user growth uh i modeled uh basically flat users for um for the u.s um and slightly growing nationally sorry sorry i thought you were going to do it or sorry sorry go ahead go ahead i was like oh i thought go ahead sorry i shouldn't

interrupt it i wanted to hear that last part what'd you say yeah so i i had modeled basically flat for the u.s and um declining in the or sorry increasing in the rest of the world now that was the thing that was slightly concerning in the last uh quarter is the rest of the world users have um actually declining year over year um which it's that that was something i did not anticipate a year ago yeah looking over people's write-ups like a year ago they were projecting 750 million maus is kind of a ballpark of a lot of people were at not um not by this year not by this year no in like 2028 whatever that um i wonder what they would change it to now yeah sounds like everyone would be lower ryan what's your final thoughts i'm gonna go with less

interested i'm definitely more interested than the last time we talked about it but i'm not i'm still a little hesitant around the business outlook like i i feel like it's a really hard platform to monetize and i just don't i don't see a lot of transactions going on within the platform yeah i think there's a reason they're not giving out a gmb number because it's slower than maybe they thought or yeah i don't think they have yeah they don't really have they don't have it they don't have it yet well you're not shop you're shopping through redirects they redirect okay well build the checkout i guess that's what leads it to mind less interested i don't like their product um rollout like their pace of rollouts has been way too slow over the

last year you're not it's like what you're not a pinner no i'm not saying that as a user i'm saying that as a potential investor one year ago we're basically saying the same thing it's like what did they do in the last year uh get that check out get all that stuff that we've been talking about um sbc i don't like and i also don't think i have a trouble just with social media companies and all these things given any sort of value of i would just have a tough time getting the read on those it's fun to revisit though because we can look at all right because last year we said these things need to happen if they happen the results could be okay nothing nothing changed yeah i wonder how many businesses are really like that where if you look back

not a lot's changed yeah and that's why i mean it's only been one year granted so yeah but you look at someone like instagram who really crushed it with reels you look at someone like tiktok who is crushing everyone i mean even twitter has had a few products and they've historically been quite poor at that um snap i don't follow them closely spotify has had a lot of stuff although they're not as much of a social platform yeah i just i would hope pinterest can accelerate their product rollout but again we don't need to beat a dead horse here stock for next week ian it is your turn what do you got i'm gonna go with hershey i know we've talked about it at the round table uh a couple weeks ago and um i'm a big fan of chocolate interested in the business so uh let's take a look

at that one a little bit of a change up all right and everyone has to bring your favorite hershey candy all right what about just a big bottle of hershey chocolate syrup here that i can just down while we're doing our episode. Yeah. They own Reese's too. So that's a nice little teaser. Two of the best chocolate brands. All right. That's going to do it for this episode. Give us a review on Spotify or Apple. If you enjoy the episode, it is really easy to do. And the best way you can help the show as a listener. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. However, Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast.

Thank you all for listening. We'll see you next time.