Hey guys it's sasha, and today i want to talk about a company that i am very interested in and that company is pinterest. This one is very interesting for a few different reasons. First, off pinterest has taken a massive hit recently, several big punches to the face, and the share price is now trading at about 45 dollars, as i'm recording this video. This is lower than it was at this time last year.

The trajectory is not looking good. Pinterest shares have been on a decline for pretty much the entirety of this year and pinterest has never turned a profit number of active users in the us. Their biggest market is falling, and yet i am very excited by the stock. At the point, when i'm recording this video, i hold a relatively small position in pinterest, but i plan to increase it significantly in the next few days.

So why would you invest in a loss-making company that seems to be declining and heading for the dumpster? Well, let's talk about it. For those who don't know, pinterest is a relatively unique, quite unusual sort of combination of a search engine and a social media platform. It is a visual way to find information a way to then store that information, so that you can always go and reference and find it again and a way of sharing that information with others, because of its unique properties. Pinterest has very unusual demographics.

The platform is very popular with women and it strongly appeals to older cohorts, higher profitability cohorts. Although this year, pinterest has managed to actually up its game and increase, and a growing number of younger users as well um and the common reference. The common reference is that pinterest is the third biggest search engine in the us, i say sometimes after google and youtube, and i am not going to get into a debate as to how exactly you define that etc. But there is a lot of really interesting stuff about how this platform works, so i decided to go and look a little deeper pinterest and that's what i spent the last few days doing and here is my take pinterest as a platform has been growing in terms Of users for some time in the last quarterly report for q2 pinterest had 454 million active users with 91 million of those in the united states, and this is the bit that investors did not like.

A year ago, pinterest had 96 million users in the united states, and the number has since then fallen by 5 million. And if you look at the earnings presentation, there is a graph of what this chart looks like for recent quarters. That number of u.s users is flat and it dropped in q2, not a good sign. Even the total annual growth rate of all the users is only nine percent, and so the investing world took the look.

I look at this and they didn't look any deeper. It seems they looked skin deep and declared the platform to be dead. A massive sell-off happened because, after all, growth in the number of users is the only metric that matters when you value a company like facebook, twitter or you know pinterest. But here is a thought.

The total population of the united states is 330 million people, and about 11 of that is under 18.. So from a usage and commercial sort of point of view, those under 18 people are probably not the target market, so you have about 294 million people in the pool if you like, and you have 91 million of them captured as active users, that's 31. So the fact is, pinterest has probably reached a point of saturation. I mean it can grow from here.

It can capture a vastly higher number, but a third is already incredibly high, so this is what's actually happening here. The jump down from 98 million active users in q1 to 91 million users in q2 and the drop compared to last year are factors that i think are primarily based on exogenous happenings things that are not to do with whether the company is growing or not things To do with what's happening in the world last year, the first wave of covid was happening big time in q2, and everyone was sat at home. You know using things like pinterest this year, q2 was very different in the winter, people tend to sit at home as well with higher internet usage and all of that kind of stuff and all things being equal. I would fully expect the number of active users for pinterest as a platform to drop, naturally in q2 and q3, if the total number of users was staying flat, but here's the bit that i think people are really missing facebook.

Let's look at facebook, they have 300 million active users in the us, so pretty much. Everyone who can read has an account. It seems, and even people who can't but a few days ago facebook released their quarterly results, and here is their daily active user chat. Look at that dark blue bit at the bottom.

That's the us number of active users and it's been completely flat for the last two years as well, and check this out. Facebook's q2 this year also had less active users than q2 last year. How surprising? But now look at the revenue per user numbers. Facebook makes 52 dollars per user in the us and 10 on average across the world per quarter.

These are really strong numbers now, obviously i am not comparing pinterest to facebook directly. I understand the two are very different. Facebook users will be far more sticky and use the platform with higher frequency. I do get that, but facebook has been growing their revenue per user very consistently year after year after year.

Just two years ago, the us users on facebook were earning 34 and the global average was 7.26, but jump back to seven years ago to q3 2022 2014 and in the annual sec filing facebook has a quarterly revenue of about 1.5 billion from u.s customers who, at That time were 206 million active users strong, so that's 7.35 per active user in the us seven times less than what they are earning today. Pinterest is very early on their journey. They only started making profits in the last few months. They are many, many years behind facebook in a sophistication of their revenue streams in the sophistication of the relationships with advertisers in the sophistication of their advertising platform and their average revenue per user in the us at the moment is five dollars and eight cents, but the Global average being just 1.32 sure they are not facebook, but this is a super visual discovery platform with high net worth target audience, and the revenues here have a long way to go in terms of growth.

You can also see that the growth in revenue over the past few quarters has been exceptional, and i expect that to continue over the next few quarters as well i'll cover that in a second and looking at a p l, i am not going to break down All the numbers in full, but when i was looking through the results, the costs have been very consistent and how they've been declining fast in percentage terms as the company is growing, its revenue and maturing every single one of those cost items is dropping into proportion and That is very normal for this stage in the company's growth, and that is exactly why they are now becoming profitable and why the rate at which that profitability is going to grow will be not linearly proportional to the rate at which the revenue is going to grow. And this is the critical bit so after i spend a few days studying pinterest, i went and made a relatively basic dcf model, and here it is: let's go through it. I am projecting for five years plus one quarter q4 for this year, q3 results are already in. They are going to be announced on thursday november the 4th in a few days, so i am going to be ignoring them here for the purpose of this dcf model.

I am projecting a 58 rate of growth for q4, which is much lower than all of the recent quarters, and that gives me 1.1 billion dollars, and then i have an annual revenue of four and a half billion dollars in 2022.. That, according to my mass, is about 55 up from what it will be this year, and i think that is a a reasonable assumption, even though it's high, it is very reasonable, given it is a massive drop from the rate at which the revenue is growing right. Now, as of the last quarter that we have data available for so i am pretty happy with that. I then continue dropping that rate of growth every single year afterwards.

I actually don't think it will drop, it might stay fat, it might even increase at some points, but let's be conservative here because of the optics uh. Let's just give it give it a slightly conservative edge. So i have it declined to 50 growth in 2023. All the way down to 32 in 2026 and some people might say well, there's no way it will continue growing but, in my opinion, the optics of where the company is right now, the stage through it and the industry they're at um.

I think that that is conservative remember. It was running at 125 growth last quarter and then i have all of the costs projected and i've kept. These super simple. I start with the costs at a relatively similar level to where they are today, and i am pre, then taking them and projecting forward by tapering them slowly as a percentage of the revenue line over time.

I tapered them much more slowly than they have recently been coming down, so they've been coming down very sharply and i'm sort of saying: okay well, they'll continue going down, but not quite as fast, and it's pretty much as simple as that. Then i have the same sort of thing for depreciation, networking, capital movements, capital expenditure - and you can see here that i'm only showing a 461 million dollar profit next year, but that then grows all the way to 5 billion dollars by 2026 and some people. Looking at that revenue, projection will say: hey that is bonkers. The revenue in 2026 is four times what it is in 2022., but i just told you how i got there and to me that actually makes a whole lot of sense, given the direction and the business model.

So then i do the same thing as i always do for working out the price target. I stick on a 10 annual discount rate. I set the perpetual growth rate to 5 here and a 20 times multiple for ebitda in 2026.. I probably could have extended this model by at least a year, maybe a few years, because the rate of growth would mean that my target price would be higher if i modeled to 2027 or beyond.

But let's just leave things at this. We can take that next quarter of the quarter after by the way. One unusual thing with pinterest that i that you might be interested in is the fact that they have no debt. They have almost no liabilities for a company at this stage of growth.

That is really rare and they also have 2.6 billion in cash on short-term investments, so that is a super healthy balance sheet for a company like them here on the right, i've taken the total number of shares, including all outstanding options and warrants that will become shares In the future, and that's what that 644 million shares number is, and then i have the two methods that spit out the answer. It's pretty simple. The perpetuity method gives me a target price of 69 and the ebitda approach is a hundred dollars with that 20 times. Multiple and given the very fast rate of growth all the way through the next five years, i would say i wasn't gon na lean much more towards that latter number.

I actually think even the latter number is probably conservative, because i'm using a multiple that is much lower than the rate of growth at that point in time, i'm also only projecting for five years but could be projecting for more. So i'm gon na set a conservative target price of about 85 on this one and as the price is about 45, as i'm recording that gives me a 90 upside, and i actually think that this valuation is so conservative, because i'm tapering the growth right down. Starting next year - and that means on that basis, i am going to be increasing my position in pinterest. I think the valuation at the moment is disproportionately low.

I will be adding to that position in the next few days, including in my manner versus the market portfolio and that's pretty much all i've got to say if you found this video useful, please don't forget to smash the like button for the youtube algorithm. Thank you. So much for watching this video, i really appreciate it and, as always i'll see you guys later.