5 things to watch in Pinterest’s IPO

April 11, 2019 11:24 AM

Pinterest, the social media app known for its image-based pin boards, is preparing to go public. Pinterest is being led by co-founder, president and CEO Ben Silbermann, who created the company by the name of Cold Brew Labs, Inc. in October 2008 and then later changed the name to Pinterest according to its SEC S-1 registration filing.

Over time, Pinterest has built a powerful e-commerce and payments engine underneath its social network site. This enables any Pinterest post to double as a portal for commerce — one that is especially powerful on mobile.

The company counts 250 million monthly active users on its online and mobile service. It has coined the term “Pinner” for its active users as they will pin images to various digital pin boards that can be shared with others or kept private. Pinterest also reports that 80% of its user traffic comes from mobile devices.

Pinterest’s revenue has more than doubled in size in the last three years, going from just under $300 million in 2016 to over $755 million in 2018. While the company is still in its startup phase and losing money, according to its SEC S-1 registration filing, losses have continued to shrink in the last few years. Unlike fellow silicon valley-based startup, Lyft, which went public just a few weeks ago, Pinterest does not appear to be buying its growth. In contrast, Lyft posted revenue of almost $2.2 billion in 2018 while it lost over $911 million – more than $220 million in higher losses than the preceding year.

Pinterest states that “substantially all our revenue is generated from advertising” (page 18 of S-1) who try to reach out to influencers and to sell products to active users or Pinners. The company had launched buy buttons or buy pins a few years back, but it updated the shopping methods on Pinterest to better reflect how its users leverage its service. Pinterest has always been known as a photo or image-based site that inspires and influences how people shop for a variety of categories such as clothing, furniture, home and living, etc. In October Pinterest added or updated several features such as “Shop the Look,” “Product Pins” with up-to-date pricing and stock information with links that go directly to the checkout page on a retailer’s site and a new “Shopping Recommendations Section” that can now be found beneath Style and Home Pins.

Oftentimes social media companies will develop a large following in their home country yet struggle to grow in international markets. There are a few great ones, such as Facebook, that can transcend borders to achieve wider global user adoption. A key trait that enables a social media app to grow internationally is the ability for localization and supporting multiple languages.

By allowing its user base of Pinners to grow beyond U.S. borders, Pinterest is able to make its platform more attractive to foreign advertisers who may want to reach not only U.S. consumers, but also foreign consumers.

Just three years ago in the first quarter of 2016, Pinterest had almost the same number of international Pinners as it did U.S. Pinners. By allowing the Pinterest app to use the language selected in the mobile device settings, it has made the app friendlier to non-English speakers. Language and other factors have allowed Pinterest to rapidly grow its international user base according to its S-1 Registration. The number of international Pinners almost tripled in size between the first quarter of 2016 and the fourth quarter of 2018.

Now its international base is more than double the size of its U.S. base, giving it a very strong hand when it comes to recruiting advertisers from overseas.

Despite success in attracting international users to its platform, Pinterest is still very heavily reliant on revenue from U.S. advertisers. According to data in its S-1 Registration (page 69), Pinterest generated almost 95% of its 2018 revenue from the U.S., based on where its users perform revenue-generating activity.

In other words, Pinterest may have a ton of foreign Pinners, but they don’t generate much money for the company — at least not yet.

The average revenue per user (ARPU) is an indication of how well a platform is able to monetize its user base. As a reference, Facebook’s ARPU for the fourth quarter of 2018 was $7.37, according to CNBC. However, Seeking Alpha, a stock investor service, says Facebook’s U.S. and Canada ARPU was $34.86 for the quarter while it had an ARPU of just $10.98 for Europe, $2.96 for Asia and $2.11 for rest of world.

Pinterest’s ARPU numbers are very seasonal, with the first quarter being the lowest and rising each subsequent quarter until reaching its highest of the year in the fourth quarter. Data from its S-1 Registration (page 70) reveals that Pinterest had a U.S. ARPU of $3.16 in the fourth quarter of 2018, compared to just $0.09 for international. This clearly represents a massive opportunity for Pinterest to monetize its foreign users.

When it comes to social media, popularity among consumers is key. According to a 2018 Internet Usage Study conducted by the Pew Research Center, Pinterest ranked fourth among U.S adults in usage behind social media giants YouTube (owned by Google), Facebook and Instagram (owned by Facebook).

While 29% of adults use Pinterest, the study found that 41% of women use the platform and only 16% of men do so. This gender skew in usage was the highest among all of the social platforms researched. The closest platforms with the next largest gaps were Instagram with 39% women and 30% men, followed by Facebook with 74% women and 62% men, and Snapchat with 31% women and 23% men.

Pinterest, interestingly, views this gender imbalance as a positive thing as it reports on its blog to existing and prospective advertisers.

The company states that a particular segment of women between the ages of 25 and 54 are particularly relevant when it comes to consumer purchases. Pinterest calls this group the “deciders” as they are responsible for the majority of household purchasing decisions. It also claims to have significant penetration within this age group.

There are two major factors that will affect how potential investors and advertisers value the Pinterest platform when it completes its IPO and how it will be valued in the future — growth of digital advertising and the impact of unbranded visual search.

According to a PwC study that forecasts U.S. advertising trends, the digital segment is expected to compose almost half (48%) of all advertising in 2022, up from approximately 43% in 2018. The study reports that digital advertising is the fastest growing segment — its compounded annual growth rate is almost 8%. In comparison, the second largest segment is TV advertising which is expected to grow from $71 billion in 2018 to $75 billion in 2022. Most other segments such as radio, newspapers and magazines will experience continued decline over the next few years. Since the trend is shifting future ad dollar growth to digital platforms, it will benefit social media apps such as Pinterest.

The other factor that plays to Pinterest’s advantage is unbranded visual search. The company reports that 97% of its top 1,000 searches are conducted without brand names, which aids in the discovery process of shopping. Since its platform relies on photos and images curated by humans into pin boards, it transforms the search process from text-based to visual. This has the effect of helping consumers discover new brands and therefore being potentially more powerful to advertisers in comparison to a text-based search on Google or Bing.