Pinterest has recently filed their S-1 and I was stoked to comb through the numbers. Social media businesses are fascinating and Pinterest’s approach to the market resonates with me because they are essentially helping consumers plan their purchases — whether via planning a wedding, Christmas list, home renovation, buying a new home, mapping out video games they like. This is a clear opportunity for advertisers. This simple fact gives them a leg up on their counterparts like facebook, line, and snapchat but lets see how the numbers are panning out.
Fast Growth and Improving Economics
Pinterest appears to be in a market expansion phase with its revenue growth almost doubling year over year. This is extremely exciting when you look at the business’s economics:
Pinterest is reducing their cost of revenue from 54% to 32% which gives me a sense that they are gaining some pricing power with the effectiveness of their platform. Sales and marketing efforts are remaining a level ratio with revenue which points to that the business should be growing at a 2x rate for some time. If business growth slows down, I’d be concerned without seeing a reduction in the team’s sales and marketing efforts. But despite the sales push, the company is reducing their lost to just -10% and points to a clearly viable business model.
Stability of Growth
With large amounts going into growth, there are questions on how long this growth can last. A dive into the company’s usage shows that they are not longer growing in the US and really seeing the expansion from outside the USA.
Looking at the average revenue per user, it’s clear that all the current revenue is driven by US consumers. I’m unclear how much the team will be able to increase their ARPU for US consumers. While there is clearly room to grow internationally, the team has so far been unable to monetize the growing international user base.
As an advertiser, I have been a fan of Pinterest and hope they continue to be successful. I think that the company has lots of potential however their slowing growth of users in the US is concerning as marketers have plenty of options of where to spend their advertising dollars. Charging advertisers more and more to achieve revenue growth sounds good to shareholders but this tactic will scare away advertisers similar to snapchat and twitter & ultimately hurt the stock. Before I take a pin this to my portfolio, I’ll prolly want to see how next year’s US user base expands and see if the team can dramatically increase their international ARPU.