Pinterest focused on massive revenue growth opportunity
Translating inspiration into action
Introduction
In a year full of promising IPOs, Pinterest will be seeking a valuation of $9 to 11B, down noticeably from their $12B valuation in 2017 when they last raised funding. It’s been a long journey for the company founded back in 2010 and certainly one full of VC money (raising ~$1.5B over many rounds).
In some ways, this IPO is a stark contrast to Lyft’s, which was characterized by more dramatic growth and more liberal losses. By comparison, Pinterest feels like a more mature, stable company, but I would argue that they have even more upside.
I’m optimistic about Pinterest’s long-term outlook given their unique value proposition and huge ad monetization opportunity.
Positioning
Our mission is to bring everyone the inspiration to create a life they love
The Pinterest mission statement is very clear about one thing: they are not a social media platform, but rather a place for discovery. This is an important differentiation from search, and sits at the crux of Pinterest’s value proposition.
When you know what you want, the Internet already has two extraordinary ways to find it: Amazon and Google. The two tech giants account for a combined 80% of initial product searches on the internet, and both have mastered the art of getting you into a checkout flow. When it comes to this search-and-buy experience, I don’t see any reason that this consolidation of power will not continue as both companies serve that function well.
In my eyes, the far more interesting problem that Pinterest seeks to solve is getting you engaged with different types of brands, products, and content in a more appealing way.
Throughout the S-1 filing, the language underscores their focus on enabling people to accomplish more. To take it one step further, they claim to be the “productivity tool for your dreams”. I think this makes Pinterest unique, and while they are certainly competing for attention with companies like Instagram, the messaging here is quite different. Pinterest’s focus is on helping you find and do things like redesigning your bathroom to trying new dinner recipes. Instagram and Snapchat would struggle to defend that same claim that they guide you towards productivity.
Pinterest breaks down its value proposition into four areas for “Pinners” (read: people who “Pinterest”):
- Visual experience: This one’s easy — Pinterest is just nice to look at. With so many new photos being generated from brands, bloggers, etc., there is unlimited content at their disposal. It’s a unique experience for users in that the screen is dominated by visuals that they can interact with. This marks a broader shift in social media where we’ve shifted away from posting statuses on Facebook towards viewing pictures on Instagram.
- Human curation and personalization: Their machine learning efforts should allow Pinterest to understand the complex relationships between people, brands, and the items that they pin. To me, the success of this is really only proven by their engagement metrics. If they do have a strong understanding of this data, they should be able to produce more engaging content.
- Designed for action: In terms of monetization, this is critical. I think Pinterest already delivers tremendous value on the first two points above, but making ideas actionable is what will ultimately fuel their advertising business. As such, it makes sense that they move towards integration with checkout flows and other action-oriented features. The most direct application is where they highlight products that are easily purchasable within pins.
- Empowering environment: Again, I think this is really capitalizing on a lot of the negative attention on social media networks today. Pinterest is saying they’re different, which I think is a welcome change. The dynamics of Pinterest do seem to have less negative connotations than popular social networks, which may be important if and when people reassess their online presence. If Pinterest is in fact the positive haven they claim to be, I could see a shift away from networks towards more Pinterest and other more fulfilling platforms.
The core experience of Pinterest is about helping you discover things you might like, which lends itself so organically to a successful advertising business.
Monetization
The S-1 perfectly highlights their monetization opportunity and how it feeds into their customer experience:
People actively seek relevant commercial content on our service, and advertisers are increasingly providing it. This fundamental alignment between Pinner and advertiser objectives differentiates Pinterest from other services, and we believe the continued growth of our advertising business will improve the core Pinner experience over time.
They are competing for ad dollars with the likes of Facebook, YouTube, etc. While both have very mature and successful advertising monetization systems, the ads are still a distraction from the utility of the platforms. We experience ads when we want to do something else. I’ll admit they are increasingly enticing, but it’s still a distraction. Now of course, Google and Facebook are doing just fine, so the advertising opportunity is still strong, but I think it’s worth highlight just how good of a fit Pinterest has by comparison.
The ceiling for how efficient the return on these ads can become is very high. That being said, they certainly have not yet capitalized on much of this opportunity. At a high level, their revenue growth has not been particularly glamorous compared to its peers:
This isn’t entirely problematic as Pinterest has been around for nearly a decade and is relatively mature as far as startups go. That being said, it’s worth noting this suggests that they are either
1) not growing their user base or
2) not improving monetization.
To the first point, they have appear to have reached a critical mass of users in the US and most of their user growth now comes from international markets. This is fine given that they are so well penetrated into their core US market, particularly with the female population which accounts for 2/3 of their users.
If we look at how they are monetizing their users, we can see that the focus has been almost entirely on the US, and their Average Revenue per User (ARPU) domestically has nearly doubled in the past two years. Another signal that monetization is working better is that advertisers who spent money on Pinterest in 2017 increased their spend by 29% in 2018, suggesting they are improving their experience for advertisers as well.
Given their user growth is concentrated in international markets where monetization is practically non-existent, we can assume any near-term revenue gains will be from improvements in domestic monetization.
This combination of graphs is encouraging as the priorities seem to be set on growing the user base internationally and improving the monetization of domestic users. In the longer-term, they may be able to translate these successes to their international users as their advertising business matures and those digital advertising markets continue to grow.
Outlook
When it comes to discovery, their most formidable competitor is Instagram, who has a mature advertising system a la Facebook and their eyes set on shopping experiences. The problem of translating inspiration into action is one that Instagram has made strides in as well:
The saving grace is that Pinterest has a stronghold on its core demographic: moms! They specifically cite that they cover 43% of US internet users and 8 out of 10 moms. With such a big base of valuable users, there is plenty of room to grow ARPU.
My only other concern is velocity. Pinterest has been around for 9 years, which is a long time given their value proposition has been relatively consistent and thus their monetization opportunity is not new. I’m cautiously optimistic of this slower pace given that many of Pinterest’s competitors are heavily resourced and encroaching on this opportunity.
With those two caveats, I still believe Pinterest’s market position and unique value proposition give it a real shot at performing well in the long-term. With a visual platform that thrives in mobile, Pinterest has a strong opportunity to translate pins into dollars. Their ability to bridge the collection and organization of pins on their website into actions and purchases will determine their success. If the product experience is strong in the moment between inspiration and action, then the advertising business will certainly flourish.
Additionally, international expansion could become valuable if monetization continues to improve domestically and gains in monetization are transferrable to international markets. It makes sense to continue to grow the user base particularly in markets with mature digital advertising markets given competitors will be looking to do the same.
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