Why I Bought Pinterest (Part 2)
I buy and share baskets of stocks called Coffee Cans. I update these regularly here on my Scorecard. Note: Coffee Can 5 is now complete. With this one, I am trying something a little different: It has 9 stocks, a lot more than usual. It does feel slightly over-diversified but as I’ve said before, it’s important to experiment. We’ll see how Coffee Can 5 performs over the next 3-5 years.
Last week I shared Part 1 of why I invested in Pinterest. I also mentioned that I like using the following simplified checklist to evaluate high potential Mavericks like Pinterest:
Is the company a Leader in a Large Growing Market?
Does the company have a Growing Competitive Advantage?
Does the company have Visionary Leadership?
Could it 10X in 10 Years?
Last week, I tackled the first two questions. Today, I’ll focus on the remainder of the checklist.
Let's get started!
Does Pinterest Have Visionary Leadership?
Yes, I believe Ben Silbermann, Pinterest’s CEO is a rare breed. Below I highlight a few qualities I admire about him.
Pinterest, to this day, isn’t well understood. To start, Pinterest is not just a visual bookmarking tool. And unlike most online services, Pinterest actually doesn’t want to keep you online, but instead wants to get you offline so that you go out and do the things you love. This is quite counterintuitive. It is this type of thinking that makes Ben a visionary in my book.
Ben started Pinterest from nothing but a vision in his head. Over time he executed on this vision, convinced others to join him, and in the process created something hundreds of millions of people use every month. And let’s not forget, as a result, he became a billionaire.
Ben is a classic example of what Brian Armstrong (CEO Coinbase) refers to as a Builder:
“Builders are unusually resilient and determined. They move from one setback to the next with enthusiasm. They know that it took Thomas Edison many attempts to create the light bulb, the Wright Brothers many attempts to achieve the first powered flight, and NASA many attempts (and human lives) to reach the moon. They have the audacity to believe they can achieve the impossible, and pick themselves up, even after repeated failure. They manage their own psychology to keep morale high, especially when the going gets tough.”
Ben has certainly faced and overcome several challenges:
When he quit Google to become an entrepreneur, his friends said they would take the leap with him. They never did. He had to start alone.
When he started, the great financial crisis happened, so funding dried up. Ben thinks he literally talked to (and got rejected by) “every single investor” in Silicon Valley. Yet he persevered.
Ben was not an engineer, which made starting up alone even harder.
These are just a few of the early challenges he faced. These types of experiences build resilience in a person.
If you hear Ben speak, he comes across as humble, calm and composed, but don’t mistake that for complacent. Ben is confident. One of the reasons he started Pinterest is because he believes in himself. His parents always used to say “if you don’t bet on yourself, nobody else will”. So he did.
Ben is also ambitious. He once said that he lives in a continuous state of “Joy and Terror”. Why? Because he recognizes that with Pinterest, “First place [will take] it all; second place [will take] very little."
However, unlike many other Silicon Valley companies, Ben hasn’t tried to artificially accelerate Pinterest’s growth. He believes that “there’s a natural rate at which you can scale a company that’s healthy.” This demonstrates his long term mindset.
Ben also recognizes that in order to build something great, he needs to surround himself with strong employees. Pinterest was one of the first (if not the first) companies in Silicon Valley to let their employees exercise their stock options over 7 years (instead of the usual 90 day period). This attracted great talent to the company early on.
Company culture is important to him. He recently wrote in a memo that some parts of Pinterest’s culture are broken and need to be fixed. To me, this isn’t simply lip service. Ben wants to create positive change where needed. One of the things resilient businesses do well is adapt...Pinterest’s employees have spoken out, and here is Pinterest’s opportunity to once again adapt. I am hopeful they will.
That said, no one is perfect. Everyone has flaws. I’m sure Ben does too. But given his track record of resilience, success, and value creation, I believe the above qualities that I’ve described make Ben a strong leader, and one that will be around for many years to come.
Could PINS 10X in 10 Years?
Of course, this is unknowable. When valuing a Maverick like Pinterest, current company results are not great proxies for valuation. Instead, we need to think about what the company may look like 5-10 years from now, IF it’s successful. That is difficult, imprecise and open-ended.
Let’s start by looking at the ad market. Global ad spend is estimated to be about a trillion dollars in 10 years. In 2019, digital ad spend was already 50% of total ad spend ($333 Billion). In 10 years, it’s likely a higher percentage, let’s say 70% so $700B is our market size.
Of that, what percent of digital ad spend will NOT go to Google/Facebook/Amazon? Let’s call it 20%. This means that Pinterest’s total addressable market is roughly $140 Billion (20% x $700B). With annual revenue just above $1B (<1% of $140 Billion), there seems to be an enormous opportunity ahead.
When I was buying the stock, I was thinking:
Can I picture a world where Pinterest can capture at least 2-5% ($3B to $7B) of this market over the next five years?
My answer was yes. It seemed very doable. In my view, to do that, Pinterest doesn't even need to take market share away from Google/Amazon/Facebook, they simply need to carve out a niche for themselves in a growing digital ad market.
Conservatively, I am confident the company can get to at least $4B in annual sales in the next 5 years. This means I paid less than two times future sales for this business (first purchase in March), and just over three times future sales for the second purchase (in June).
Not bad for a highly scalable founder-led creative monopoly with global aspirations, and a company which was growing over 50%/yr last year.
How Does Pinterest Get There?
Growing Global MAU & ARPU:
International markets are really where the growth will need to come from. The good news is that international MAU is growing fast while international ARPU has tremendous room for expansion.
Pinterest has demonstrated that its visual discovery engine is language-agnostic. They have a playbook about how to enter and expand into new markets, and it’s working. As I mentioned before, if Twitter/Snap can generate ARPUs that are multiples higher than Pinterest, I believe so can Pinterest.
To get to these ARPUs, it will also be important to level-up their self service advertising tools so that it’s easier for small businesses to advertise on Pinterest.
eCommerce:
Pinterest has the potential to own the Top of Funnel for serendipitous discovery, and therefore facilitate more Commerce:
Products: The recent Shopify partnership demonstrates that Pinterest can be effective for product discovery.
Perhaps an Etsy partnership is next?
Services: In the future, Pinterest can also be effective for “Service discovery”.
While decorating a room, imagine being able to book a painter or an interior decorator.
Or while planning a wedding reception, imagine being able to book a wedding planner, or someone who can create that perfect flower bouquet for you.
The possibilities are endless.
Note: I am not including this in the $4B revenue forecast.
Video:
Video also represents strong upside optionality for Pinterest.
Can they accelerate growth and engagement by expanding their visual language to encompass video, a much more engaging format?
They’re trying. They also recently partnered with Vimeo to streamline Video Pinning. More recently, Q2 showcased encouraging early results: daily video views grew over 150% year over year, while unique video uploads grew over 600% year over year.
With a large (and growing) audience of 416 million monthly active users, I am willing to give the founders some leeway that they can figure out an effective way to monetize this highly engaged audience.
What Future Returns Could Be?
Without doing a complete financial model, if we make a simple table (Potential 2025 Sales on the left VS. Potential 2025 Price to Sales Multiples at the bottom), we get the below 5-year return distributions.
Of course the above is a simplistic valuation. I’d encourage you to think about what margins the company could have and its ability to turn that into free cash flow.
Red indicates where I’d lose money
Yellow indicates where I’d make money
Blue indicates where I’d at least double my money
Green indicates what’s needed for a 10X
For the March purchase of $12.68/share, if Pinterest can meet my $4B 5-year revenue forecast, with just a 2X sales multiple, I wouldn’t lose money. A 4X multiple would result in a double.
For the June purchase of $21.75/share, the bar is a bit higher.
Concerns
Although the above is promising, Pinterest is still what I consider to be a Stage 2 Maverick (a Contender). They still need to defend their turf and prove their legitimacy to the world.
So here are some risks we need to keep an eye on.
Signal Loss:
The biggest near term risk in my mind is how effectively Pinterest can combat signal loss. This is a real risk and has the potential to reduce the effectiveness of Pinterest Ads.
Proximity to Purchase:
People come to Pinterest for inspiration, but then go elsewhere to buy.
Will this limit Pinterest’s upside?
Social Channels:
Networks like TikTok and Instagram have been successful at capturing people’s time and attention. This always has the potential to change how people discover new products in the future.
Company Culture:
I have heard accounts that claim that Pinterest moves slowly as an organization. Employees have said the company can lack focus. If persistent, this could certainly catch up to them.
But, I believe the company is very long term oriented, and the founding team is extremely resilient, so I am willing to give them the benefit of the doubt.
Note: This is of particular interest to me so if you have any insight into this, do please connect with me on Twitter (@mrjivraj) or by email.
Wrapping Up
Well, that describes why I bought Pinterest. Do you agree or disagree with me?
So far, the stock has done well. But let’s see where it goes from here.
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