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Like every other social media platform out there, Pinterest (NYSE: PINS) recieved a massive boost in users during the Covid-19 pandemic when everyone was stuck at home, adding more than 100 million users to the platform. Now, the company is planning to expand its user base beyond 500 million monthly active users in 2024, and hopes to get these new users to click on special ads, courtesy of a partnership with the e-commerce giant, Amazon (NASDAQ: AMZN) and Google (NASDAQ: GOOG).
While initially met with skepticism, this collaboration has proven to be a resounding success, propelling Pinterest to new heights and transforming the way people use the platform from just looking at pictures for inspiration to full-on shopping. This partnership is not only changing the way people see Pinterest as a platform, but also how investors view PIN stock.
In April of last year, Pinterest announced a partnership with Amazon, which indicated that Amazon’s advertising customers could now display ads on the image-sharing app. Basically, Amazon generates advertising revenue when businesses pay to promote their products on its marketplace. Now, when businesses pay for this, their products could be promoted on either Amazon or on Pinterest.
What made those ads special is that they were image-based, meaning that they looked like part of Pinterest’s natural image-browsing experience, and didn’t feel like interruptions. This deal is part of Amazon’s strategy to grow its advertising services segment, which has quickly become one of Amazon’s largest and fastest-growing business segments. In fact, in Q4 of 2023, Amazon’s advertising services revenue was $14.6 billion, a 27% year-over-year growth.
In comparison, Pinterest’s Q3 total revenues were just $763 million. This deal is important to investors in PIN stock since it can grow and add revenue streams for the company. But when Pinterest first announced the partnership, it made it clear that its benefits won’t be felt right away. The company stated that the partnership will be implemented over multiple quarters and be rolled out in early 2024.
Even though the effects aren’t immediate, the partnership is still an amazing revenue-boosting catalyst for Pinterest, simply because Amazon’s ad business is 1,800% bigger than Pinterest’s entire business. This means that Amazon’s ad inventory is way larger than Pinterest’s, and the larger supply of ads on Pinterest’s platform could boost the price Pinterest charges per ad.
A higher ad inventory also means that Pinterest can show more relevant ads to its users. With increased accuracy and relevancy, the ads’ performance will improve resulting in more product sales and in turn, potentially creating more demand from advertisers. In addition to that, the partnership can help increase Pinterest’s profit margins since the ads come from Amazon’s customers, and this means that Pinterest will spend less on sales and marketing.
Without this partnership, Pinterest would have to try to convince Amazon merchants to advertise on its platform – spending time and money on outreach. But thanks to its deal with Amazon, the advertising will happen automatically without Pinterest having to convince anyone.
More to Come?
Since the announcement at the end of April, PINS stock has increased roughly 61%. The results of the partnership have led some investors to take a second look at the stock, especially now that the company has announced a Google Ad deal as well
According to Thomas Champion, a Piper Sandler analyst, about 50% of Pinterest’s monthly active users which amounts to around 482 million people, are shoppers with about 60% vertical overlap to Amazon.
To give you an idea of how huge this is, you should know that if these users click on just one Amazon ad per month, Pinterest could earn about $124 million in incremental revenue, which would translate into a 4% increase in total revenue growth in 2024.
Now that Pinterest has announced the third-party ad integration with Google, it will focus on monetizing some of its international markets. This is important because of the notable ARPU gap between Europe and the US for Pinterest. While its not abnormal for their to be a gap between these two markets, Pinterest’s gap is twice as large as Meta.
As is, approximately 80% of Pinterest’s users are outside the US, but these users account for only 20% of its revenue. As of Q3 2023, its ARPU was just $1.61 likely because its average revenue per user outside of the US is just $0.12.The partnership with Google offers an opportunity to capitalize on these undermonetized markets and also introduce a mix of ad categories outside of retail. PINS’ CEO, Bill Ready, sees this as an opportunity to increase its ARPU internationally but even if it is successful it will take some time before its results bear fruit.
In light of this partnership, there are now multiple reasons to be bullish on PINS stock. Pinterest has just recently started to reap the benefits of its Amazon partnership, showing a remarkable improvement in ad relevance, a 50% increase in search relevance, and an impressive 100% boost in related items. Given how successful this partnership is proving to be, the outlook for PINS stock is significantly brighter since the effects of its Google partnership has yet to be reflected.
Outlook for PINS Stock
Pinterest’s main goal for 2024 is to expand its user base beyond 500 million monthly active users. This would result in consistent revenue growth and with further implementation of third-party ads, it will also help users view Pinterest as a place to shop rather than just a place for moodboards.
As is, the company reported global monthly active users of 498 million at its Q4 2023 earnings. While this represents an 11% increase YoY, the company’s journey towards monetization has not met the expectations of analysts. The company missed revenue expectations by $10 million despite reporting a beat on EPS. Its expectations for Q1 2024 were also less than expected with revenue in the range of $690 – $705 million, for 15-17% growth YoY.
Part of the problem is its Global ARPU which amounted to $2.00 in Q4 2023. While ARPU reached $8.07 in the US and Canada, the rest of the market – excluding Europe – was just $0.15.
Comparatively, the majority of Facebook’s new users come from outside the US, but it still achieved $13.12 in global average revenue per user in Q4. In the US and Canadian market, Facebook’s APRU reached $68.44 while Asian markets achieved $5.52 and the rest of the world had an ARPU of $4.50.
If Pinterest increases its monthly active users and uses these ad partnerships to increase its ARPU, it could significantly increase its revenue since it has a notable advantage over other platforms. Facebook users want a social media platform and therefore see ads as invasive, whereas Pinterest’s central role is to find inspiration for things users want to buy which makes ads an almost seemless integration.
As Pinterest works to tackle its low-engagement problem by shifting users towards the mobile app, improving personalization, and acquiring relevant content, the outlook for PINS stock appears particularly bullish.
Over the last three months, EPS estimates have been revised upward two times, compared to one downward revision, while revenue estimates have seen nine upward revisions versus one downward move.
This is partly because Pinterest as a business already functions well. Over the last two years, it has beaten EPS estimates 88% of the time, and has beaten revenue estimates 75% of the time. The stock also gained nearly 48% in the last year, outperforming a 20% gain in the broader S&P 500 Index.
Pinterest’s balance sheet gives another reason for confidence. As is, it has no debt and more than $2 billion of cash and cash equivalents. Thanks to its healthy balance sheet, there might be some potential there for significant M&A deals in the future.
There’s also the fact that Pinterest’s fastest growing and most engaged user group is Gen Z, and this is a particular area of strength for the platform since it could help keep Pinterest relevant going forward.
Even though this all sounds very bullish for PINS stock, the company is still facing some challenges that need to be addressed quickly.
As some analysts have noted, this earnings season has led to questions of whether smaller platforms like Pinterest and Snapchat (NYSE: SNAP) are at a structural disadvantage in what “increasingly looks like a winner-take-most digital ad landscape”. Alphabet and Meta have the firepower to take up most of the ad space while smaller players are left in the dust.
Despite these fears, PINS management is confident that there is more room to grow in this aspect, while others are unconvinced that PINS can achieve the metrics necessary. There is also the risk that Pinterest becomes too reliant on Amazon and Google for advertising. If these partnerships were to end, it would leave Pinterest high and dry if it neglects its own advertising efforts.
The continuous evolution of digital advertising could trigger a shift away from relying on third-party cookies to track and target users. As this happens, Pinterest must invest in new technologies to stay ahead in terms of privacy-safe measurement tools and relevancy in ad delivery.
PINS Stock Forecast
Currently trading at 40x this year’s EBITDA, PINS stock is not the great catch it was when the deal with Amazon was first announced. But the deal with Google could give it a second wind, helping justify this premium.
With all of this in mind, the current PINS stock price reflects the market’s recognition of Pinterest’s potential. The dip following its lackluster Q4 results could be an opportunity for bullish investors who believe that these partnerships, and new ones that could come in the future, will help PINS conquer a valuable share of the ads market.
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