Our online world has some stalwarts – like Amazon, Google, Twitter, Facebook, LinkedIn. As Pinterest (PINS) debuts in the public markets, we wanted to take a look at what Pinterest really is and what it might become.

As a user, I appreciate the visual discovery power of Pinterest. As a hobby, I build furniture and do projects around my barn. Getting inspiration used to be looking at magazines like Fine Woodworking, touring museums or visiting fancy stores in Paris. A few minutes on Pinterest is hugely productive. No other platform offers the type of visual discovery that Pinterest does.

It’s hard to make money as an “inspiration” source. The company strategy is to monetize with advertising and e-commerce. For example, you’ll now see “Promoted” content among your pins.

E-commerce is more interesting. The example below speaks to the power of Pinterest versus a specialized site like Houzz or Wayfair (NYSE: $W). These retail sites do a decent job with what one might call parameterized search but it’s really hit and miss.

By selecting just one item for a list I’m able to get very good related options without having to do anything. Further clicking and visual navigation build the board and hone the suggestions.

The promoted content from companies like Wayfair and Home Depot are still not very good. For example while looking at “cool furniture” an electric garage door opener is presented to me by Wayfair and Home Depot gives me a stainless steel sink to consider. Sure it’s better than “Get Started with Weight Watchers” but it’s a far cry from truly curated and relevant advertising.

A Real Play on Consumer Curated Commerce

When companies like Twitter and Facebook were growing up there was this idea of “social commerce.” It resonated because for many people recommendations from friends carry more weight than any advertisement. There was a notion that by following people their favorite products and services might be easily discovered and shared on the platform.

This simply hasn’t happened. People use these platforms to share things but not really about their product preferences and design ideas. There are dedicated groups and forums to be sure but they are very limited in their scope and user base. For example, I’m a member of several rare bourbon groups on different platforms but their appeal is narrow and offers little monetization in the form of advertising or e-commerce.

For lots of transaction-focused e-commerce, we rely on reviews at Amazon, TripAdvisor, Yelp and sometimes Google. So far the only curated commerce has come from specialty companies. An early one was Zulily which did come public back in 2014. See Zulily Management Happy to be Misunderstood for more on that. Liberty Media (owner of QVC) bought them for $2.4B. For a while Zulily was valued much higher but operational problems set in as they worked to scale up their model.

There are numerous smaller examples today. For example, online purveyors like Huckberry focuses on “cool gear” from numerous sources. Others have taken a membership model and gone in this direction. Bespoke Post is one of the best of that breed.

These companies are filling the needs of specific groups of consumers who want to discover and buy things that are unique and match their individual styles and aspirations. It’s a far different sale than a typical e-commerce site – even Etsy (ETSY).

Valuation & Stock Conclusion

One thing that’s refreshingly different about Pinterest is that what you do there has a fair amount of persistence. In some ways, you are building an “identity asset” that can be projected onto the universe of goods and services to discover and buy things in a fundamentally different way than you can anywhere else.

The numbers are also going in the right direction. Revenue growth is good at 50% and gross margins are moving up consistently to reach 68% in the last fiscal year.

Pinterest is growing revenue at over 2x the rate of their user growth (21% last quarter) because they are early in the monetization process. Using Facebook as an example Pinerest should be able to generate $5B in revenue from their current user base versus their current $800M run-rate. That would also drive significant operating income.

A quick PFV points to some decent upside in PINS around the offer price. We expect it to price above the range and trade up from there so we won’t know what entry price will be available. We also think there is some hidden asset value in the content that Pinterest users have built over the years. Advertising and ecommerce are obvious ways to begin to unlock it but there could be more.


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