Pinterest & Peloton Q4/Q2 Earnings Recap

What happened after their earnings reports?

Pinterest ($PINS) and Peloton ($PTON) announced their earnings results Thursday afternoon and it was a tale of two cities when it comes to earnings reactions.

Pinterest shot up 10%+ in after hours and Peloton tanked nearly 10% in after hours. During the next trading day, Pinterest was up as high as $86.49 and Peloton dropped as low as $142.70, yet at the end of the day, $PINS settled at $81.96 (+5.29%) and Peloton at $148.30 (-5.86%).

I added to both of my positions Thursday evening and during the open market on Friday. I bought Peloton a few hours after earnings since the share price tanked after what I thought was a strong report and I bought Pinterest Friday late in the day when the stock started to trend down.

Pinterest Q4 2020 Earnings Summary

Pinterest’s earnings results were stellar. When I inputted the results into my spreadsheet, I was in shock. As stated in my earnings preview, I was looking for a number in the low 60s and when I saw the 76%, I was like “OMG.” Then they guided for “low 70s” for Q1 which totally blew me away since generally, you start to see a slowdown in revenue growth after years of compounding 40-50%+ returns. I’m surprised the stock wasn’t up 20%+ after a report like this since this was an insanely good report in my opinion:

  1. Revenue was up 76% (US up 66%, International up 145%), this is an acceleration from their 59% from last quarter and is the highest YoY revenue growth rate that they’ve shared since their initial S-1 filling. Also, this 76% growth was on top of a 46% growth rate in the previous year, so it’s not like it was an “easy comp” or anything like that.
  2. They were GAAP profitable. This was pretty impressive seeing how their best net income margin was -9% last Q4 and this quarter it was nearly 30%. GAAP EPS was $0.30.
  3. MAU’s grew 37%. While this wasn’t overly impressive when you look at the numbers sequentially, nonetheless, 37% growth is very strong. US was up 12% YoY but was flat QoQ but International was up 46% YoY and 5% sequentially.
  4. Total ARPU grew 29% to $1.57 where US ARPU grew an impressive 49% to $5.94.
  5. Operating cash flow for the year was $29 M with Q4 coming in at $101 which was pretty impressive.
  6. Adjusted EBITDA Margin for Q4 was 42%!

When I was reviewing their earnings transcript, I was surprised in some way of their first priority:

The first priority is inspiring content. For us, everything starts with inspiration. It’s why people come to our service. It’s why businesses come to connect their products and services with the people who love them. And so we want to continuously evolve the way that we inspire our users.

I guess I just never connected the dots, but this totally makes sense. Personally, I’ve used them for wedding planning and bathroom renovation inspiration.

I read that they introduced a new feature called “Story Pins” which sounds interesting and it’s nice to hear that it’s totally different than the other “Stories” that all the other social platforms are copying from Snapchat.

Their international business is booming, growing 145% YoY and it’s now 16% of their overall business (annualized) which is up from just 10% last year. Senior management seemed to be pleased with their overall international business growth:

We also expanded our sales team in Western Europe to monetize our engagement there. Drilling down, auto bid was once again a meaningful contributor to our strength in Q4 and was especially so for small, small and medium sized businesses. And I’m pleased that our international business grew 145% year-over-year on the back of strong advertiser demand. International markets now represent 17% of total revenue.

When they provided guidance and shared growth drivers, it was definitely great to hear just how many major growth drivers they have working for them:

Turning to our preliminary outlook for Q1, we expect to grow revenue in the low 70s percent range in Q1. As we think about Q1 in the full year, we expect positive trends from our investments in add tools like shopping and automation, and sales coverage expansion to continue. We plan to expand our international coverage further in existing geographies, and also expand monetization into Latin America in the first half of the year. We also want to be mindful that we’ll be navigating a fluid landscape, we’re keeping an eye on a few things.

LATAM is a huge market and I personally invested in Pinterest because I saw a lot of potential in their international expansion, so this looks like they are fully executing on that and it’s becoming more and more meaningful to their overall business.

When an analyst asked which verticals were outperforming besides specifically ecommerce related verticals, management had a strong response that was really encouraging:

So that was the biggest driver. But we saw strength across really every vertical. Travel still is a lag laggard. But in general, retail, CPG and a number of other verticals really performed well. We saw strength across objectives. We saw strength in large advertisers through the small and medium-sized advertisers. So it was a remarkably strong Q4, but anchored by the longer holiday shopping period with an emphasis on retail.

As a marketer, I was pleased to hear that they are trying to make their ads more relevant since the worst thing that happens when paying for paid marketing is for your ads to show up in non-contextually relevant areas where it eats up impressions that you may be billed for (if you’re being billed on a CPM model).

Moving into 2021, one of the big areas that we’re focused on is driving more relevant ads, and we’re going to do that by growing the number of advertisers. We think that if we can provide really relevant ads, especially in surfaces like search, it’s a win-win. It helps consumers because they’re seeing inspiring content relevant to what they do every day. It’s great for advertisers, because they’re finding consumers who are really looking for inspiration, but they haven’t yet decided exactly what they’re going to buy.

Finally, it looks like their auction is starting to become more competitive which is helping to increase eCPMs. That’s exactly what you want to hear as an investor: pricing power. More eyeballs are always great things to have but being able to charge more for each one of those eyeballs is even better and similar to Snapchat, Pinterest is starting to see more interest from advertisers that makes the auction more competitive which enables for CPMs to go up:

So in the past we talked a lot about — most of our revenue if not all of our revenue growth being driven by impressions, as opposed to effective CPMs or pricing. What we’ve seen and saw in the fourth quarter and through the course of 2020, is that — there’s far more balance. And now that we’ve started to see as we’ve been telling you over time, eventually pricing will start to contribute more to our revenue growth. And that’s exactly what we’re seeing. That’s in part due to industry-wide demand, and auction pressure, we’ve continue to grow the number of advertisers on the platform and gotten more share of wallet with our incumbent advertisers, which has been important.

Valuation

Pinterest has a < 30 TTM EV/S multiple and they just guided for 70%+ growth. Compared to other tech companies in the space with other comparable growth rates, I think this company is a steal on valuation. If Q1 grows at 70%+, Q2 will likely be near 80% if not higher given how COVID completely wrecked this business in Q2. Q3/Q4 it’s hard to say, but even a conservative estimate shows FY ’21 bringing in around $2.3 B in revenue which is a 36% growth rate.

Compared to ROKU which obviously isn’t exactly in the same space but it does largely advertising, ROKU has an EV/S of 35 and Snapchat has an EV/S of 38. I expect Pinterest will eventually expand its multiple assuming no major macro factors impact the economy or market. Assuming Pinterest can maintain the multiple they had just prior to earnings, they should expect a share price of $91 but I think that’s too low given the momentum of the business.

Peloton Q2 2020 Earnings Summary

I thought Peloton had a solid earnings report which is why I bought shares after hours. When I inputted the numbers into my spreadsheet, which is what I do prior to looking at the actual share price movement to see how my analysis compares to market sentiment, I personally thought the share price would drop after hours because the guidance wasn’t amazing but I still thought it was a strong report.

Peloton guided for $1.1 B in revenue in Q3, that’s a 110% YoY increase from last year on what was already a fairly large number. Remember, Peloton has just about 10x’d their revenue in just 4 years. In 2017, they finished the year with $435 M in revenue, in 2020, they will finish around $4.1 B. So every quarter is basically a “tough comp” in my opinion.

So $1.1 B is impressive though sequentially it’s only up 3.3% which is the slowest growth they’ve had in awhile. Based on what was said in the earnings report, a big part of this is likely due to their continued delays in shipping. Ever since COVID started back in March of last year, demand has been off the roof and Peloton has not been able to keep up which has resulted in shipping delays that can mean 2-3 months before final delivery which is pretty frustrating when most people are bored out of their minds and want to join friends who also have Peloton’s. Also, there are plenty of articles that say that Peloton is losing potential customers to competitors due to the super long shipping delays. For some context, I personally bought a rowing machine and that took 2 weeks and I was really getting antsy after just a week, imagine being promised something would arrive in 2-4 weeks to only have it pushed back 2-4 more weeks if not longer.

Anyway, the shipping delays was likely a big contributor to their share price decline after hours the following market day. Management during the earnings call stated emphatically that they were doing everything they could and were investing $100 M into expedited shipping to reduce the wait time:

To address this issue, we will continue to invest heavily in systems, teams and manufacturing capabilities to ensure we don’t disappoint our customers going forward. Importantly, we are going to do everything we can to get back on the right side with our new members. In order to do that, we are investing over $100 million in expedited shipping to reduce the wait times for our products.

They were also peppered with questions through the earnings call about shipping and I found this quote helpful as it states that this shipping delay issue is going to be resolved in the coming months:

But what I can say is that we do expect that this $100 million, which we recognize is a very large investment. We believe will get us back to normal shipping protocol by the end of this fiscal year.

Here’s another response about shipping:

Yes. I’m glad you asked Scott. We are planning to get back to normal order to delivery on our Bike product line way before the end of this calendar year. I would say, by in mid to late spring we should be in the below four-week order to delivery timeframe. So we are putting points on the board and eating into the backlog and then we’re going to be back in good shape before you know it. So it’s not going to take us the rest of this calendar year by any stretch.

There you have it. Management believes they will return to normal shipping protocol by the end of this fiscal year which is June 2021 (remember this is “Q2”). Obviously if they aren’t better by June 2021, there will likely be hell to pay, but for now, you gotta trust management since they have already outperformed every expectation you could have about the growth of their business.

When it comes to COVID and the prospect of declining demand after the vaccine rollout, management had a solid response:

When the vaccine was announced in the fall, you saw a reaction to the stock, but we did not see any reaction to our sales or demand. We still have not seen any softening since that vaccine was announced and since the vaccine has been rolling out. So other than investors getting nervous, the consumers are still feeling like they want to work out at home.

The fact that they have not seen a softening in demand after the vaccine rollout on top of the fact that Peloton is getting killed on social for their shipping delays is pretty impressive. These are all temporary setbacks that Peloton will eventually overcome and for a long-term investor, this just continues to fuel the bull thesis. This is a company that has transformed how we exercise and has made exercise more competitive, fun and most of all convenient. Who the hell wants to drive to a gym when you can get a better experience in the comfort of your home. Rolling out of bed and jumping on the bike just became a lot more real when it comes to figures of speeches.

Peloton’s UK launch of their new Tread product has been well received and it has exceeded their expectations, which is exciting news as it shows additional promise of more revenue drivers internationally:

We are very excited about the new Tread, which went on sale in the UK on December 26. We’re pleased with the UK market reception, particularly as it represents the first time we’ve offered a Tread product to our international members. UK Tread sales have exceeded our expectations and our early reviews have been overwhelmingly positive.

Peloton is also launching the Tread in Canada next week, so it will be interesting to see what the response is and how that contributes to revenue growth in the next 12-months. Management seems confident that the rollout will be met with strong enthusiasm similar to that of the UK:

So everything, we’re seeing as we noted with UK on Tread, and then we’ll learn next week from Canada, but all early signs there in terms of leads in Canada, just the same thing, strong demand for that product.

Valuation

Peloton’s TTM EV/S is < 15 currently after the share price decline compared to 19 right before this earnings call. They are growing revenue at 100%+ per quarter and have an interesting blend of being a hardware company and a subscription service business. Their blended gross margins are at 40% and will only improve with time as subscription revenue becomes a larger part of their business. I personally don’t understand why this company continues to trade at such a discounted multiple compared to other tech companies with such high revenue growth rates.

This is similar to how I felt about Roku where they were growing revenue in the 50% range and had a < 20 multiple for quite some time before finally rocketing to a 30+ multiple. I think we just need to be patient with Peloton, their time will come. Management continues to deliver strong performance and the stock has reacted very positively. Once these shipping issues are resolved and COVID is behind us and where Peloton can “prove” it can grow just as fast in a post-COVID world, I think we should see some solid alpha. In the meantime, I’m going to be patient and be opportunistic on share dips.

Wrapping Up

I think both Pinterest and Peloton had solid earnings reports, but Pinterest was the clear winner in terms of absolutely crushing expectations. I still believe that both of these stocks are some of the best stocks you can own this year and I expect some solid share price appreciation in the coming weeks and months as analysts dig into the earnings results and make recommendations. Pinterest and Peloton both have market caps around $50 B and I expect that the road to $100 B is a quick one given their future revenue estimates.

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