Pinterest Research Report

A Catalog of Ideas

Pinterest is a “virtual and social pinboard” that allows users to share interesting and inspiring ideas, images, and tastes. The company pioneered something unique—people’s desires to go past personal relationships and the clutter of information, and connect with others who share their common interests in a format that is visual and appealing. Visual, social and commercial align perfectly to capture the mobile e-commerce wave we see coming. Pinterest offers brands, highly-engaging content, ease of discovery, and a highly coveted user base. This cocktail of attributes differentiates it from other social media sites and forms the basis of the revenue story. Initiating coverage with a positive outlook, tempered partially by few concerns.

METHODOLOGY

Our views on Pinterest are derived from our rigorous research process involving proprietary channel checks with users, brands, competitors, and experts in ecommerce and social media.

KEY POINTS

  • Digital Discovery Has Evolved. Digital discovery has evolved since the mid-1990s, having transitioned from a browser and search based world, to a social world that shares ideas based on shared interests rather than current events and personal stories that may or may not have any value. Yesterday’s text and fixed banners are visual and mobile today.
  • Pinterest – A Leader in Next-Gen Digital Discovery. Launched in March 2010, Pinterest represents the next generation in digital discovery. Combining the discovery features of search engines with network effect of engaging social networks, Pinterest is well positioned for advertisers and ecommerce. Unlike some social networks, Pinterest is perfectly suited to the mobile format and seamlessly pivoted to mobile.
  • Robust User Metrics and Highly Coveted User Base. Pinterest is the premier go-to site for affluent, educated female shoppers looking for mobile discovery and commerce. The site had 100 million unique visitors in September. Over 80% of the base is female, and over 50% of the base is in the 18-49 age group, two attractive features for brand advertisers and ecommerce. Pinterest users are taste shapers, brand ambassadors and substantive purchase decision makers.
  • Clear Path to Monetization. With images doing all the talking, and ecommerce made simple by “Buy It” buttons, the site is perfectly suited for ad-based and ecommerce revenue model. The market opportunity is large – global search ad spending is projected to reach $131B by 2019 and global social ad spending $36B by 2017 – the on-boarding process is simple, active participation is effortless and ideas are abundant. Given the user base with a high intent to purchase, the referral and conversion rates are high.
  • Two Prominent Risks: Digital Showrooming and Market Fragmentation. Virtual pinboarding has attracted the attention of specialized knock-offs and also the majors – Facebook, Instagram and Twitter, among others. Users may not want to engage in ecommerce on the site, instead preferring to use it as more of an inspirational tool.
  • Fairly Valued at $9.0B in 2015; 2018 Valuation at $10.5B. Our relative valuation methodology is based on comparative public EV/Rev and EV/MAU multiples. There is room for valuation upside if the company can generate better than expected user metrics and higher revenue conversion rate.

Exhibit 1: Pinterest User Base (M)

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Source: Manhattan Venture Research

 

Exhibit 2: Revenue Trend ($M)

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Source: Manhattan Venture Research

Executive Summary

Pinterest is a leading interest-based social network with close to 100 million monthly active users.  Co-founded by Ben Silbermann in 2008, the site launched in 2010, is based in Palo Alto, California, has 731 employees and has raised $1.3 billion in funding to date.

Digital discovery has evolved since the days of browsers and web portals in the mid-1990s to search engines and social networks. Now we have the next iteration of social networks that combine the discovery features of search engines with the scale and engagement of social networks, resulting in a highly engaging site and a loyal user base.

Sharing images and content isn’t a new development. The earliest social media success stories relied heavily on users creating and sharing their own content. Whether it is was creating a photo album on Flickr, writing a status update on Facebook, writing a blog post, or uploading a video to YouTube, the social media world’s main focus centered on driving creation.

Today, users want to connect with others based on shared interests rather than to share current events and personal stories that may or may not have any value. Users don’t necessarily like every single thing their friends like. They are willing to trade their personal relationships to get the content they want. The “shopping mall” idea has given way to a “boutique” store model. This new generation of social media facilitates content creation and curated experiences based on interests. In this iteration, content, not people, are the engines that drive users. Pinterest is a premier player in this intersection of content creation and content consumption.

Figure 1:  Evolution of Social Media

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Pinterest is a premier player in the intersection of content creation and content consumption

Source: Manhattan Venture Research

Core Thesis

Our core investment thesis on Pinterest is positive with a few caveats. We like the utility value of the site and its highly coveted user base – particularly from an ecommerce and advertising perpective. The site lends itself to monetization, which the company started doing in mid-2014. The market opportunity is large and the company still enjoys a first-mover advantage. Our enthusiasm for the company is partially tempered by two concerns: the monetization program may not meet expectations given competitive offerings, and the risk that users may not want to use the ecommerce features on the site, instead preferring to use it as more of an inspirational tool – an online wish list of sorts. On balance, we believe the positives outweigh the concerns and forms the basis of our bullish thesis.

  • Bull Case: Pinterest is the go-to site for ideas, with functions similar to Twitter’s tweet and retweet but all in inspiring, curated images. Pinterest is a “catalog of ideas”, as one company executive characterized it, and we concur. Users can ‘pin’ their photos on their pinboards or ‘repin’ another users’ visuals. Additionally, a user may organize his or her pinboard by subject or share a board with their followers to facilitate collaboration. It is both neatly organized and visually appealing.

Pinterest is growing its user base at an impressive clip, and in 2015 the growth rate outpaced Facebook and Twitter – albeit from a smaller base. The user count in and of itself, while impressive, is not as important –  number of other social sites have large numbers – as the quality of its user base: roughly 85% of the user base is women, and over 50% of the base is in the 18-49 age group, two features highly coveted by advertisers and brands.

Another key attribute of the site is its clear path to monetization. The aspirational nature of the pins, combined with a highly “intent” user base, makes it ideally suited for brand advertisers to pay for and have a strong presence on the site. Furthermore, the company’s vast library of content across multiple verticals sets it up well for attracting both social and search ad dollars. Search advertising opportunity, in particular, is significant in our opinion, with Google the undisputed leader in the space.

  • Bear Case: Pinterest was a pioneer in virtual pinboards at a time when text-based communication was still the norm and attracted a lot of attention. Today, visual images have become commonplace, if not the norm, led by Instagram and Snapchat, among others. Additionally, a number of specialty Pinterest knock-offs have come online. While Pinterest has the advantage of a wide offering, the flip side is that it might be, or get, too overwhelming for some, thereby chipping away the competitive edge at the margins.

Another key risk factor is the company’s recent monetization program roll-out. Early indication is that the beta program initiated in mid-2014 got off to a good start, with a number of established vendors advertising on the site. But the program is still very early stage and revenue conversion may not live up to expectations in the face of new “Buy It” options on Facebook, Twitter, and specialty Pinterest-like sites.

Valuation

Valuing Pinterest is a challenge, as with most private companies. The company is relatively new with limited operating history. Additionally, it turned on the revenue spigot in mid-2014 so valuing the company using the discounted cash flow methodology is not reasonable, unless we make speculative assumptions at the risk of being dead wrong.

As revenue and monthly active users (MAUs) are the only two metrics available at this point, we valued Pinterest on a relative valuation basis. We believe the company exited 2014 with a run-rate nearing $100 million, or roughly $25 million per quarter. We expect revenues to ramp up appreciably in 2015 and thereafter on the back of three revenue drivers: brand advertising, direct response advertising and ecommerce.

We peg Pinterest’s fair value at $9.0 billion, based on a blend of the two relative valuations: $8.9 billion based on the mean EV/Rev multiple and $9.1 billion based on the mean EV/MAU multiple.

Pinterest’s last post-money valuation was $11 billion in May 2015 when the company completed Series G round of $533 million. Given the expected valuation reset in the private markets, the company’s untested monetization strategy, and increasingly competitive landscape, we believe our $9.0 billion discounts the risk factors while giving full credit to revenue growth. We believe there is room for valuation upside if the company can generate higher than expected revenue growth on the back of robust MAU growth and effective monetization.

Figure 2: Valuation Summary

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Source: Manhattan Venture Partners

 

Figure 3: Pinterest Home Page

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Source: Pinterest.com

 

Investment Positives

Strong User Metrics

User metrics are important barometers of the value of social networks, and closely followed by management and investors. While the absolute user metrics in isolation might not tell the full story, in combination with others, the underlying metrics such as engagement levels, rate of user growth, demographic profile, and conversion rates are meaningful indicators of the long term viability of the network.

Pinterest was launched at a time when text updates dominated social media. However it didn’t take long before the image-centric service – a new concept at that time – skyrocketed to the top of the charts. Only two years after the debut of the site in 2010, Pinterest was named the third most popular social network in the U.S., directly behind social giants Facebook and Twitter.

Fast forward to 2015 and Pinterest has maintained its robust user growth profile. According to data from eMarketer, Pinterest was ranked the highest in terms of year/year growth of active users in the first quarter of 2015, at 97%, followed by Tumblr at 94%, and Instagram at 46%. Facebook in contrast fell 8% over a 12-month period and Google+ grew a modest 7%.

 

Figure 4:  Leading Social Media Sites/Apps Worldwide, Ranked by Growth in Active Users, Q1 2015

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Pinterest crossed the 100 million monthly active user (MAU) mark in September 2015

Source: eMarketer

Upward User Growth Trajectory

Pinterest crossed the 100 million monthly active user (MAU) mark in September 2015, a significant milestone for any social network, but more so in the case of Pinterest given the high number of new entrants. While the absolute MAU number is modest compared to Twitter, Instagram and Facebook, the reality is that Pinterest, unlike the traditional social networks, is a niche search and discovery service where users come for discovery and commerce, and brand advertisers enjoy the twin benefit of showcasing their brands in a holistic way and developing a loyal following.

A testament to the popularity of the site, and a sure sign that it has become part of our way of life, is the fact that “Pin it” has become a verb, in the same vain as Facebook’s “like” and Twitter’s “tweet”. Does this have any predictive value? Only time will tell!

 

Figure 5: Pinterest User Growth Trajectory (Mil)

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Source: comScore, eMarketer

Pinterest Rate of Growth Outpacing Twitter and Facebook

We looked at the user growth trajectory of Pinterest, Twitter and Facebook in the first five years since the launch, and three years thereafter, of the respective sites. Pinterest surpassed Twitter in its fourth year (2014) and is on track to surpass both Twitter and Facebook in its fifth year since inception (2015), and thereafter through 2018, our forecast period. For reference Pinterest launched in 2011, Twitter in 2010, and Facebook in 2007.

 

Figure 6:  Pinterest’s Faster Relative Rate of Growth

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Note: *Pinterest Year 1 = 2011; Twitter Year 1 = 2010; Facebook Year 1 = 2007

Source: eMarketer, comScore, Thomson Reuters, Manhattan Venture Partners

 

Figure 7:  Pinterest’s Relative MAUs and Rate of Growth

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Source: eMarketer, comScore, Thomson Reuters, Manhattan Venture Partners

Strong Engagement

Pinterest users are highly engaged. The site had over 48 billion Pins as of December 2014, categorized by people into over 965 million boards. The number of search queries increased 142% year-over-year in December 2014 to 1.2 billion. As of January 2015, 1.4 billion search queries were conducted, and that number has since moved up as we await the release of the latest confirmed figures.

 

Figure 8:  Pinterest Search Queries (Mil)

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Pinterest users are highly engaged

Source: comScore

Pinterest is well positioned on a relative scale, based on market data from comScore (Figure 9). Facebook remains the goliath of social media, leading all social networks with 81% reach of the total U.S. digital population and nearly 230 billion minutes of user engagement. With time spent that is 18 times that of the next biggest social network, Facebook is in a league of its own. Excluding Facebook’s metrics, the chart below from comScore highlights the penetration and total engagement minutes of the leading social sites.

 

Figure 9: Audience Penetration & Engagement Levels of Leading Social Networks, U.S., Dec 2014

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Source: comScore

Easy Discovery and High Purchase Intent

Pinterest has become a reservoir of ideas spanning number of categories. In many cases, Pinterest is the first stop for planning events, making purchases, or just looking for new ideas.  The site’s unique visual topic-based curation approach has attracted a number of brands, particularly retail, lifestyle, food, home decor, design, publishers, and travel brands. Not surprising, Pinterest has grown into a marketing powerhouse with new features like profile pages, Rich Pins, enhanced search, and Promoted Pins. Now approaching the fifth year of its website, the popular discovery, sharing, and storage tool is a social staple for consumers and brands alike. And understandably so for the following reasons:

  • Referral traffic from Pinterest has been growing every month. Internet users are naturally drawn to attractive, high-quality visuals. They process information quickly when it’s presented in the form of images and they’re more willing to engage with such content. And more engagement with visitors translates to more referral traffic to other sites. According to Shareaholic’s Q3 2014 Social Media Traffic Report, the rising popularity of Pinterest brought in more than 3x the traffic of Google Plus, YouTube, Twitter, StumbleUpon, LinkedIn and Reddit combined. And more recent market data suggests that Pinterest is second only to Facebook in social media traffic referrals.
  • Brands can develop a loyal following. Given the inspiring theme of the site, brands can develop a loyal following by posting beautiful pictures that not only show their products but also the company’s vision and character that is not easily apparent in company catalogs and advertisements. Additionally, brands can use Pinterest to showcase their history and their latest innovations to inspire their own employees as well as the visitors to the site.

Pinterest has been particularly ideal for retailers and small businesses that have devised strategies to ride the site’s popularity. Bergdorf Goodman, for instance, has developed a following for its high-end clothing and accessories with beautiful pictures of its latest collections on the site. Similarly, Etsy.com, an online crafts marketplace is using Pinterest’s price display feature so when Pinterest users “pin” an Etsy chair on a board for their followers to see, the image of the chair will automatically include the chair’s title, and a banner showing the price. Similarly, a number of small businesses have indicated that Pinterest has been particularly helpful in boosting their sales, thanks to the significant increase in referral traffic.

With Pinterest users so actively engaged with exploring ideas or projects that may lead to purchase, it is not surprising that Pinterest users are among the heaviest online spenders. But it’s not just that Pinterest users tend to spend more online, there are unique aspects of Pinterest as a social commerce channel that suggests its ads might be very effective at driving purchase.

Pinterest has a highly coveted user base from an advertising and sales perspective

When social mentions of brands occur on large-scale social media platforms, like Facebook for instance, they tend to activate consumers at the top of the purchase funnel by driving awareness and interest for something they were not otherwise actively considering. At the opposite extreme of the funnel, consumers may find themselves actively in market for a specific purchase and they consult socially-driven reviews on sites like Yelp, Angie’s List, Amazon or TripAdvisor. And somewhere between these two extremes lies Pinterest, which activates the consumer in the middle to lower portion of the funnel – when they may be particularly receptive to purchase and looking for ideas or inspiration. Perhaps they are planning for a wedding or designing a nursery. Maybe they want to take on a Do-it-Yourself project at home or bake something fun. Users’ ability to bookmark content relevant to their projects is a way of capturing intent; information the platform can then leverage to help marketers guide the consumer down the funnel toward conversion. This application makes Pinterest ads potentially much more valuable on a per impression basis.

Ultimately, all three parties win: visitors purchase what they want, advertisers get a high ROI on their investment, and Pinterest wins a loyal visitor and advertiser.

Highly Coveted User Base

Pinterest has a highly coveted user base from an advertising and sales perspective. It has been well documented that women shop more than men, and advertisers prefer an affluent user base in the 18-49 age bracket. Pinterest offers both these attributes.

 

Figure 10: Pinterest Gender Breakdown

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Source: comScore

The overall base is comprised of affluent women in the ideal age bracket of 18-49. In the U.S. specifically, roughly 52% of the women in the 18-54 age bracket are on Pinterest, majority of them in the Midwest region of the country, and globally over 85% of the overall user base is women. Additionally, men are increasingly using Pinterest for their searches and roughly 93% of pinners (male and female) shopped online in the past six months.

The following chart gives Pinterest’s user breakdown by age and income. The base is disproportionately skewed toward the 18-49 age group, and annual income in the $30-$75K bracket. Both highly desirable attributes.

 

Figure 11: Pinterest Demographic Profile of US Users: Age and Income, April 2015

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Source: eMarketer

Looking specifically at Pinterest’s digital penetration in the U.S, women comprise 53% of the company’s total digital penetration. Slicing it further, women comprise 25% of the company’s desktop penetration, and 42% of the mobile penetration.

 

Figure 12:  Pinterest % Reach by Platform

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Source: comScore Media Metrix Multi-Platform

While Pinterest’s current demographic profile skews towards women, the platform is quickly making inroads into the male population. In December 2014 for instance, the male audience grew 41% year-on-year, and the average time spent on Pinterest tripled to more than 75 minutes per visitor. So while Pinterest may be one of the better platforms for reaching the female audience, new opportunities are emerging to reach their growing and more engaged male audience.

 

Figure 13:  Pinterest Average Minutes per Visitor: Dec 2014 vs. Dec 2013

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Source: comScore Media Metrix Multi-Platform

All Translates to High Conversion and Referral Rates

Against this demographic backdrop and the unique nature of the site, the referral and conversion rate from Pinterest is high. According to market data from various sources, up to 47% of online consumers from the US have bought stuff online based on Pinterest recommendations. Only 20% of pins are original, the remaining 80% are repins. This is significant because it translates to a high probability that unique images posted on Pinterest will be repinned repeatedly, and gather lot more brand recognition than something similar would via Facebook ‘shares’, Twitter ‘retweets’ and Instagram’s ‘shares’.

Additionally, the contextual relevance of each pin on Pinterest has been documented to garner four times more revenue per click compared to Facebook and Twitter, according to one study. This is because on Facebook and Twitter one has to follow a person in entirety, exposing one to a lot of personal and unwanted information. Pinterest on the other hand gives people the option to select just the boards that are interesting. This ensures that the pins on the user’s dashboard are relevant to their interest and may therefore encourage them to click through to the links and consummate a transaction.

Optimized for Mobile

Mobile first is the mantra across the digital world. Users are spending more time on their mobile devices than ever before, and social networking sites missing out on the desktop to mobile transition are doing so at great peril. We all know the negative impact on Facebook at the time of its IPO when the company reported that it was not optimized for mobile. Similarly, Google had to (and still is) transition to mobile search monetization, away from its traditional, and lucrative, desktop search advertising revenue stream.

Pinterest has stayed ahead of the curve in this transition. The company announced in 2014 that 75% of all daily traffic and 72% of monthly usage, comes from native mobile apps via phones and tablets. Mobile usage is especially high in the evenings and on weekends.

 

Figure 14: Pinterest MAUs – Preferred Method of Access to the Site

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Source: eMarketer, Manhattan Venture Research

International Growth and Strategic Partnerships

Similar to the growth trajectory in the U.S., Pinterest is experiencing strong growth in the large EU markets, albeit from a relatively smaller user base. Today roughly 60% of new users come from outside the U.S., which is not surprising given similar trend at other major social networks. Overall, as of 2014, roughly 33% of Pinterest users were based outside the United States, and the international user growth rate is higher than in the United States.

The company plans to grow its global footprint with a primary focus on Europe. New office locations are planned in Spain, Italy, the Netherlands and Sweden, raising the global presence to nine countries including existing offices in the United Kingdom, France, Germany, Japan and Brazil. In 2014 (last available data), the service became available in 31 languages, up from less than 10 in 2013.

 

Figure 15: New User and Geographic Split

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Source: Pinterest

Strategic Partnership with Apple

One of the distinguishing features of Pinterest is the discovery feature to map to one’s user map. Whether it’s a recipe for a new cuisine or a specific app, Pinterest makes it easy to find it. Leveraging this strength, early this year Pinterest entered into a strategic partnership with Apple.

Now as iPhone and iPad Pinterest users surf the service they’ll be able to see “app pins,” which are pins that can be opened to download mobile apps direct from Apple’s App Store. Users will come across app pins when they are posted by those they follow or when an app pin comes up as a result when they use Pinterest’s search feature.

The tie-up with Apple is a win-win proposition for both Pinterest and Apple. While Pinterest will not be making any money on paid apps that are downloaded after being discovered on Pinterest, the company stands to benefit in a number of ways including adding Apple’s vast library of apps to its service, not to mention the prestige that goes with being associated with Apple. More important, this tie-up will not only increase its catalog of content, and give users more reason to use the service, it has vast revenue implications. The holy grail of advertising today is search advertising, an area totally dominated by Google. By adding Apple’s vast app collection to its rich content. Pinterest, in effect can start attracting search advertising to its platform.

Apple on the other hand benefits by addressing a key concern – the complaint that the Apple App Store is not very good for finding new apps. By tying up with Pinterest and making its catalog of apps available for discovery, Apple is moving a step closer to addressing the complaint.

Clear Path to Monetization

Digital ad spending worldwide, according to the most recent market data from eMarketer, is projected to reach $170.9 billion in 2015. Search ads, representing roughly 48% of the total digital spend and a key driver of digital ad spending, are projected to reach $81.6 billion, an increase of 16.2% over 2014. By 2019, search ad spending is projected to reach $130.6 billion globally, implying a 4-year CAGR of 15%.

Similarly, eMarketer expects advertisers worldwide to spend $23.7 billion on paid media to reach consumers on social networks in 2015, a 33.5% increase from 2014. By 2017, social network ad spending is projected to reach $36.0 billion, implying a 2-year CAGR of 26% and representing 16.0% of all digital ad spending globally.

 

Figure 16: Pinterest Advertising Opportunity

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Pinterest is uniquely positioned to take advantage of both search and social advertising spending

Source: eMarketer

Pinterest is uniquely positioned to take advantage of both search and social advertising spending. The company’s unique and vast content library is well positioned to attract search ads, and the highly visual and aspirational content is perfectly suitable for social ads. Lifestyle products, for instance, where emotion and inspiration rather than ratings and reviews are the keys to getting consumers to purchase, social ads are an ideal choice. Search ads in contrast are ideal after consumers have made the decision to buy and are looking to complete the transaction.

From a marketer’s perspective, social ads allow marketers to create visually engaging content that inspires consumers to click, engage and share. When advertisers buy social ads, they get more than just clicks – something you get in search ads – they receive the free impressions and clicks from users sharing the ads with their networks. This creates an immediate halo effect for an advertisers campaign, increasing the brand equity and raising the overall ROI on the ad spend. This is in stark contrast to search ads, which tend to be very transactional by nature – designed for consumers who have already made up their mind to purchase, so are served right before the point of purchase.

Investment Concerns

Pinterest was a pioneer in virtual pinboards at a time when text-based communication was still the norm and attracted a lot of attention. Today, visual images have become commonplace, if not the norm, led by Instagram and Snapchat. A number of specialty Pinterest knock offs have come online. Against this backdrop, digital showrooming and untested monetization program are major investment concerns.

Susceptible to Showrooming

Pinterest’s tasteful and aspirational boards has one drawback. It exposes the site to digital showrooming, something akin to the showrooming that the traditional brick and mortar stores are battling every day. Given the increasingly competitive options, users may not want to engage in commerce on the site, instead preferring to use it as an inspirational tool.

Pinterest is not the only social network today that’s looking to offer e-commerce features to merchants and other businesses. Pinterest like sites are popping up everywhere as entrepreneurs rush to duplicate the incumbent leader in image-sharing social network. There is a Pinterest clone or visual social network for just about any specialty topic you can think of, including travel, recipes, fashion, weddings, and cats, to name just a few. There are scores of general interest copycats, too. Most copy the grid-like visual design of the original, and many allow people to bookmark and share images they find on the Web in virtual albums similar to Pinterest pinboards.

That said, and to Pinterest’s benefit, the probability of most of the copycats succeeding as well as Pinterest has is low in our opinion. Social networks tend to be a winner-take-all affair in business, thanks to the network effects that make it more useful for people to hang out in online spaces where the largest number of people are congregating. That is particularly true for visual bookmarking and social image-sharing, the category of service these sites fall into. Pinterest it appears has the critical mass, the community, the content library and the network effect – all the key requirements for a sustainable company.

Two examples of specialty copycats:

  • Trippy – Social Site for Travelers: Trippy is an amazing site for travelers. You can share travel ideas with friends, create boards to plan a trip and ask ideas and recommendations from others. I’m a total newbie using the site, and can’t wait to get to the pro status, already in love.

 

Figure 17: Trippy Screenshot

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Source: Company website

  • Foodgawker – Social Bookmarking Site for Foodies. Foodgawker is visual bookmarking all things food, and you can find food photos (that typically link to recipes) by category. If you are tired of everyone submitting their semi-homecooked cupcake recipes made out of box on Pinterest, Foodgawker is for you for finding truly stunning (and delicious) food. The site is moderated and only the best photography approved.

 

Figure 18: Foodgawker Screenshot

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Source: Company website

Untested Monetization Program

Another key risk factor is the company’s relatively new monetization program, introduced in mid-2014. The company also recently introduced “Buy It” buttons on the site, with the idea of charging a premium ad rate for brand pins that have “Buy It” buttons. While charging referral rates and/or commission rates on click-through is not part of the current strategy, we expect it to be an integral part of the strategy later on.

Additionally, the major networks have also jumped into the fray. Facebook launched its own take on the Buy button for the News Feed this summer, and Twitter more recently expanded its own “Buy Now” buttons to Bigcommerce, Demandware, and Shopify, as well as Best Buy.

Early indication is that the beta program initiated in mid-2014 got off to a good start, with a number of established vendors advertising on the site. But the program is still very early and handicapping the success of the program is difficult at this point. While the advertising opportunity is big, the competition is intense and Pinterest will have to prove its value proposition to the marketers.

Valuation

Pinterest is a relatively new company with limited operating history. The company turned on the revenue spigot in mid-2014 so valuing the company using the discounted cash flow methodology required many assumptions, which could prove to be unrealistic. As revenue and monthly active users (MAUs) are the only two metrics available at this point, we applied the next logical valuation methodology: relative valuation.

Accordingly, we peg Pinterest’s 2015 fair value at $9.0 billion, based on a blend of the two relative valuations: $8.9 billion based on mean EV/Rev multiple and $9.1 billion based on mean EV/MAU multiple

Pinterest’s last private round valuation was $11 billion in May 2015 when the company completed its Series G round of $533 million. Based on our analysis, the company will grow into the $11 billion valuation in the 2017-2018 time frame, given its expected revenue growth trajectory. We believe our valuation discount to the last private round is justified for the following reasons: the ongoing valuation resets of private companies reflected in recent IPOs closing below IPO price; the company’s untested monetization strategy; and increasingly competitive landscape.

That said, we believe there is room for valuation upside if the company can generate higher than expected revenue growth on the back of robust MAU growth and effective monetization.

The following chart summarizes our blended valuation. This is followed by a detailed description of the two methodologies used in the implied valuation.

Figure 19: Valuation Summary

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Source: Manhattan Venture Partners

Below is a brief description of the two valuation methodologies:

I.  Valuation Based on Comparative Revenue Multiples

Pinterest’s comparative public market valuation is based on a basket of companies in three categories: social networks, e-commerce and search engines. We believe this basket captures all aspects of Pinterest’s current and futures businesses.

Accordingly, the average EV/Revenue multiple is 3.8 times our 2018 revenue estimate of $2.8 billion, which implies an enterprise value of $10.5 billion in 2018. Applying a 5% private market discount, and a 3-year discount factor to derive the present value at the end of 2015, results in an EV of $8.9 billion, or $31.86 per share, based on 281 million shares outstanding.

 

Figure 20: Comparative Public Market Multiples

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Notes:

(1) Average 3-month closing stock prices as of October 1, 2015; (2) $/CNY = $0.16                                              

Source: Yahoo Finance, Thomson Reuters, Manhattan Venture Partners

II. Valuation Based on EV/MAU

Additionally, we looked at the valuation based on a comparative EV/MAU basis. The mean EV/MAU multiple for our sample of companies is 79.6x. Applying this multiple to Pinterest’s expected average MAU of 120 million at year-end 2015, and applying a 5% private market discount, results in a valuation of $9.1 Billion, or $32.32 per share.

 

Figure 21: Comparative EV/MAU Multiples

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Note: Average MAUs as of 2Q2015

Source: Company reports, Manhattan Venture Research

Private Market Valuation – Series G

Pinterest closed its last private funding round, Series G, in May 2015. The company raised $533 million, or $35.90 per share, at a post-money valuation of $11 billion. The following figure highlights all the rounds and the implied post-money valuations.

 

Figure 22: Pinterest Post-Money Valuations

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Source: VC Experts, Manhattan Venture Research

 

Financials

Revenue Model

Pinterest currently monetizes through brand and direct response advertising. Longer term, Pinterest plans to extend the program to include ecommerce.

The company launched its monetization beta program in 2014. In February 2014, it launched its “promoted pins” advertising beta test, which allows businesses to use Pinterest as an advertising platform by increasing visibility of companies’ pins on search and category feeds. Up until the beginning of 2015, the service was limited to select firms, the likes of ABC Family, Gap, Kraft, and Target, before opening up the platform to major brands.

The program requires companies to pay for the number of times their promoted pins appear in user’s search on a germane keyword; in other words, companies pay for “impressions”. Cost is based on a thousand ad views or a cost per mille (CPM) standard. (To calculate CPM, the money spent on an ad is divided by the number of impressions, and multiplied by 1,000).

Earlier this summer, Pinterest also unveiled Buyable Pins on its website and later, on October 5, announced that it was expanding the reach of its Buyable Pins– meaning those pins that allow you to make purchases directly on Pinterest – to several more e-commerce platforms, including Bigcommerce, Magento, and IBM Commerce. The company previously supported Buyable Pins with Shopify and Demandware, when the feature first launched earlier this year. With the addition, a large number of new merchants will be able to offer their products and services to Pinterest’s users.

Alongside the announcement, Pinterest also offered an update on the Buyable Pins program as a whole. In total, there are now 60 million Buyable Pins on Pinterest. This compares with a base of over 50 billion pins on the site, suggesting a compelling opportunity to expand the “shoppable” base on the site.

In addition to the expansion, several big-name brands came on board, including Wayfair and Bloomingdale’s, who will be working with the Buyable Pin program directly, as well as Demandware merchants DVF and Steven Alan. Furthermore, a large number of new Shopify stores are being added.

Buyable Pins, which are a type of pin that’s infused with richer data, including things like the item’s price and options, are meant to be the next logical step beyond product discovery and inspiration – which is what Pinterest is still known for today. Instead, the idea is that merchants can actually convert Pinterest users into customers right on the Pinterest site or mobile app. Users tap on the “Buy” button and can then select the specific product (like color, size, etc.) and then complete their purchase. Users can access Buyable Pins on iPhones and iPads and pay with credit cards or Apple Pay.

The merchant keeps 100% of the sales, while Pinterest generates revenue via its advertising tools that help merchants and other brands promote their pins across the site. The pins are also designed to be mobile-friendly, and support easy checkout mechanisms like Apple Pay. This gives Pinterest an advantage against traditional e-commerce websites, many of which still force users to complete lengthy online forms while tapping on their phone’s tiny screens. Given that 87% of the user base has purchased a product after finding it on Pinterest, the Buyable Pins make sense.

Pinterest also introduced animated Promoted Pins, called Cinematic Pins. Brands will be able to target about a dozen audience types from foodies to gardening enthusiasts to millennials. The new animated ads are a bit different from the moving ads developed by rivals like Facebook and Twitter. On those platforms, videos start when you stop scrolling over them and stop when you scroll away. On Pinterest, the opposite happens. The Cinematic Pins are seen in motion as the user scrolls, but the motion stops when the scrolling stops. A number of brands already have tested the feature, including Unilever, The Gap, L’Oreal, Nestlé, Walgreens, Target, Visa and Wendy’s.

Merchants who want to register to sell products through Pinterest would have to enlist with either Shopify or Demandware. Once enlisted, they can choose to place Buyable Pins for some or all of their products. Products that do not have the buy option can be stored as regular pins.

Revenue Projection

Our model is based on a bottom-up analysis driven by user growth and ARPU projections. We looked at comparative user growth rates and ARPU of other leading social media companies such as Facebook, Twitter, Snapchat and LinkedIn, to stay close to industry trends and growth rates. Our baseline 2014 estimates were compiled from multiple sources including: eMarketer and comScore estimates; growth rates of competitors; publicly available data on the company from news releases and management comments; and finally our own channel checks with industry experts.

Pinterest’s user base has been growing at a steady pace. We believe the company exited 2014 with 165 million in registered users, 80 million monthly active users, $0.39 in ARPU and $24 million in revenues. The revenue spigot was turned on in mid-2014. For 2015, we expect $127 million in revenues on the back of 115 million MAUs and $1.31 in ARPU.  We expect sequential improvement thereafter, leading to 301 million MAUs in 2018 and $2.5 billion in revenues.

We are not making any profitability projections given the limited operating history. Our best guesstimate on profitability at this point, based on industry run rates, is not until late 2017, early 2018, by which time we expect meaningful revenues.

Figure 23: Pinterest Revenue Model

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Source: eMarketer, comScore, Manhattan Venture Research

 

Funding

Pinterest has raised $1.3 billion in 10 rounds (series G) to date, following the initial $500, 000 from angel investors in January 2010, and Series A funding in May 2011, led by Bessemer Venture Partners, at a post-money valuation of $40.0 million. The last round was completed in May 2015 for $533 million at an $11 billion post-money valuation, and $35.90 per share.

Figure 24: Pinterest Funding Rounds

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Source: SEC Filings, VC Experts, PitchBook, CrunchBase

 

Management Team

Ben Silbermann, Co-Founder & CEO

Ben Silbermann is a co-founder and CEO of Pinterest. Prior to this venture, he served as a Product Specialist at Google and served as a consultant for the Corporate Executive Board. Mr. Silbermann earned his bachelor’s degree from Yale University.

Evan Sharp, Co-Founder

Evan Sharp is a co-founder of Pinterest. Prior to that, he served as a Product Designed at Facebook (March 2010-June 2011). Before joining the social network, he co-funded HeadFooter Design and was Lead Designer at Catalyst (September 2007-December 2008). Mr. Sharp also served as a business consultant for the City of Chicago from November 2005 to August 2007. He earned his Atrium Baccalaureus in History from the University of Chicago and his graduate degree in Architecture in Columbia University.

Tim Kendall, Director of Monetization

Tim Kendall became the Director of Monetization at Pinterest in March 2012. Mr. Kendall previously held the title of Director of Monetization at Facebook (June 2006-December 2010). He served as the Product Manager at Amazon as a Summer Intern (June 2005-August 2005). From May 2002-June 2004, Mr. Kendall was an Associate at JP Morgan Partners. He worked as a Contributing Writer at Forbes (March 1999-May 2000). His work history also includes Garage Technology Ventures, where he was an Associate. Mr. Kendall earned his Bachelor of Science degree in Industrial Engineering at Stanford University. He received his MBA from the Stanford University Graduate School of Business.

Michael Akkerman, Head of Marketing

Michael Akkerman was recently hired as the Head of Marketing Developer Partnerships (APIs). Mr. Akkerman was formerly the Vice President, Global Solutions Consulting at Kenshoo. At Kenshoo, he built a team of pre-sales consultants to complement the company’s product innovation and execution. He brings to Pinterest his expertise in Search Engine Optimization, Paid Search, Paid Social, Display, Mobile Marketing Strategy, and RTB. Mr. Akkerman received his Bachelors of Arts in Psychology and History at University of New South Wales located in Australia. He participated in student exchange program to study in the United States at Purdue University.

Appendix

Site Features

Access to Pinterest is currently “invite only”. New registrants can request an invite from Pinterest or can be invited by someone who is already a Pinterest user. After receiving an invite, new users have the option of registering directly on the site or, for faster access, can register via Facebook Connect or a Twitter account. The user interface is extremely intuitive and self-explanatory:

  • Users sign up for a Pinterest account and start looking for pictures/images that they like. They then set up “boards” that describe the images that they want to collect like “Home Decoration Ideas” or “Vacation Spots for Summer Holiday.” Pinterest provides its own categories as well, but they are more general than what users typically prefer. After naming the boards, the user nests them into the Pinterest categories.
  • The users also install a bookmark button that lets them “pin” practically any image they find online to one of their boards. For instance, if they stumble across a picture of an exotic lake in Australia while reading a blog, they can click the button to pin it to their “Travel Destinations” board.
  • When a user is on the Pinterest site, he or she can see what other people are posting and “repin” the images to their boards.
  • Pinterest also stores the source of the images it hosts, so users can click through any picture to find the site where it originated, which could be a blog, online magazine, Etsy seller page, or any other site.

Rich Pins

In addition to App Pins, Pinterest offers a broad set of Rich Pins, which are a special type of Pin that makes using the platform more straightforward and seamless. These pins include extra information beyond just the image, click-through link and the Pinterest’s description. Currently, there are six types of Rich Pins:

  • Place Pins include a map, address, and phone number.
  • App Pins include an install button, so Pinners can download an app without ever leaving Pinterest.
  • Article Pins include headline, author and story description, helping Pinners find and save stories that matter to them.
  • Product Pins include real time pricing, availability and where to buy. Pinners also get notification

Features

Pins

A pin is an image or video, either from a website or uploaded directly by the user. A description can be added to pins.

Figure 25: Screenshot of Apple Pies with a Description

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Source: Pinterest

 

Boards

Pins can be organized by topic, also called boards. By default, Pinterest starts users off with four boards, but these can be deleted or renamed to suit a user’s interests.

Figure 26: Screenshot of Pinboards

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Source: Pinterest

Following

Like Twitter, users can follow anyone, even if they aren’t following them back. They have the option to follow all of another user’s boards, or just a selected few boards. Users can sign in using their Twitter or Facebook account, which makes it easy to find all of their friends who are already using Pinterest.

Figure 27: Followers

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Source: Pinterest

 

Repins

Repins are the “retweets” of the Pinterest world. Repinning is sharing an image pinned by someone a user follows or found while browsing Pinterest, and then adding it to one of their own boards. Repinning gives credit to the person who first pinned the image. Users can also edit (or add to) the description when they repin something. Source links also stay on the pin no matter how many times it is repinned. Users don’t need to be following someone to repin their content.

Figure 28: Examples of Repins

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Source: Pinterest

Likes

Liking a pin just adds it to the “Likes” on the user’s profile, but doesn’t add it to one of their boards. A user doesn’t need to be following someone to like their pin.

Pinning from the web

Users can add a “Pin It” button right into their browser to easily pin things they come across on the Internet (this is currently only available for Chrome). A choice of which image to use from the page you are pinning is provided. Users can then select which board to add the pin to and can add a description. The source link is automatically pulled in.

Sharing

Anytime users pin something on the site, they can easily share it on Twitter and Facebook. There are also share buttons alongside any pin they click on.

In the near future, we believe Pinterest will expand the number of things users can pin, including videos from Hulu, Vimeo, and Netflix. Pinterest is also working on an API that one day will allow other companies to build apps that interact with the data on the site. The company’s top priority right now with the API is to expand their own site to other platforms, like the iPad, and then to open itself to third parties.

About Manhattan Venture Partners

Our Research Methodology

Manhattan Venture Partners provides clients with accurate, timely and innovative research into the companies and sectors we cover. To that end we have established an experienced team of analysts, researchers, economists and industry veterans that focus exclusively on private companies with a proven track record of success. Producing quality research on a private company is uniquely challenging. Our analysts communicate with employees, ex-employees, early investors, VCs, competitors, suppliers and others to gather valuable information about the company under coverage. This information enables us to create unique financial models that value the underlying company and provide insight to our clients and industry experts, leveraging years of experience working for bulge bracket firms.

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About the Analysts

Santosh Rao

Santosh Rao has over 18 years of experience in equity research, primarily within the technology and telecommunications space. He started his equity research career at Prudential Securities and later served as a Vice President and Senior Equity Analyst at Broadpoint Capital (Broadpoint Gleacher), where he specialized in the telecommunications equipment and services sectors. Prior to joining Manhattan Venture Partners, he was Managing Director and Head of Research at Greencrest Capital, focusing on private market TMT research, and prior to that at Evercore Partners’ Institutional Equities Group, focusing on telecom and data services companies. Mr. Rao started his career as a Financial Analyst at PaineWebber (UBS) and later at Prudential Securities in the Financial Analysis & Reporting Group. Santosh earned his Bachelor of Arts in Economics and Accounting from Rutgers University and an MBA in Finance from Rutgers Graduate Business School.

Max Wolff

Max Wolff is an economist specializing in international finance and macroeconomics. Before joining Manhattan Venture Partners, he was Chief Economist at Greencrest Capital, and prior to that spent four years as the senior hedge fund analyst at the Beryl Consulting Group LLC. Mr. Wolff teaches finance and statistical research methods in the New School University’s Graduate Program in International Affairs. Max’s financial markets and Macro-Economics work appears regularly in Seeking Alpha, The WSJ, Reuters, Bloomberg, The BBC, Russia Today TV, and Al Jazeera English.

Disclaimer

I, Santosh Rao, certify that the views expressed in this report accurately reflect my personal views about the subject, securities, instruments, or issuers, and that no part of my compensation was, is, or will be directly or indirectly related to the specific views or recommendations contained herein.

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Manhattan Venture Partners LLC (Hereafter “Manhattan Venture Partners”), the parent company of Manhattan Venture Research, does and seeks to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This document does not contain all the information needed to make an investment decision, including but not limited to, the risks and costs.

Additional information is available upon request. Information has been obtained from sources believed to be reliable but Manhattan Venture Partners or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. All pricing information for the securities discussed is derived from public information, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. Manhattan Venture Partners does not engage in any proprietary trading.  The user is responsible for verifying the accuracy of the data received.  This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Manhattan Venture Partners does not have ownership of the subject company’s securities. Manhattan Venture Partners does not have any market making activities in the subject company’s securities. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.

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