The following segment was excerpted from this fund letter.


The digital advertising market continues to take market share from other forms and is evolving into a three-headed dragon in the form of Facebook (NASDAQ:FB), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Amazon (NASDAQ:AMZN). There is a lot to be said for the market power of these businesses, given the amount of time over 2 billion of us spend using their services each month. However, we believe that advertisers prefer more than these three increasingly expensive options, and users spend their time on other sites as well. One of these is Pinterest (NYSE:PINS), a social media site where hundreds of millions of monthly users self-identify projects or products they like. From a high level, we like the visual nature of Pinterest relative to competing second-tier social media platforms such as Twitter (NYSE:TWTR), which is more text-based. Advertisers like visual platforms to share their products (think TV vs. radio) because as the old adage goes, a picture tells a thousand words.

Pinterest currently has over 322 million monthly active users (MAUs), and 73% of them (235 million) live outside the U.S. As with other social media platforms, Pinterest monetizes its users in the U.S. better (with more ads at higher prices) than other geographies. 90% of Pinterest’s revenue comes from its U.S. users, which represent only 27% of users. We expect Pinterest will monetize its international users better over time, and due to the fact that its international users are growing at a faster rate than U.S. users, there will be a double benefit from improved international monetization.

Pinterest is a small position in part because we are making some educated guesses about its steady-state economics, using its peers Facebook, Twitter, and Snapchat (NYSE:SNAP) as a guide. Facebook is a behemoth, with nearly 2.5 billion monthly users worldwide, which grew 8% in the last year. We don’t believe FB is going to end up being a useful comparison for PINS, but clearly Pinterest is being valued at a discount to the second tier of social media stocks, despite the visual nature of Pinterest which we believe gives it an advantage in luring advertisers.

We expect PINS to continue to gain users, which will increase its value organically. We also expect as the platform becomes better appreciated as an advertising medium that its value per MAU will increase towards the levels of its closer competitors Twitter and Snapchat. We believe that we can earn returns of 20% or more for the next few years based on its organic growth alone. If the value per user moves in the direction we believe is likely, then returns could be greater.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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