A banner for online bulletin board Pinterest Inc. hangs on the New York Stock Exchange on the morning of Pinterest’s IPO on April 18, 2019.
Spencer Platt | Getty Images
Company: Pinterest (PINS)
Company: Pinterest is a visual discovery engine that lets people find inspiration for their lives, including recipes, style and inspiration for home, DIY, and more. It also provides video, product, and idea pins. Pinterest displays machine-learning visual recommendations based on pinners’ likes and interests
Market value: $13.5 billion ($20.40 per share)
Activist: Elliott Management
Percentage of ownership: ~9.0%
Average cost: n / A
Activist Comment: Elliott is a very successful and shrewd activist investor, especially in the technology sector. Their team includes analysts from leading technology private equity firms, engineers, and operational partners. When evaluating an investment, they also hire specialist and general management consultants, expert cost analysts and industry specialists. They often watch companies for many years before investing and have a large stable of impressive board candidates.
What is happening?
In the wings
Pinterest is a great company – it has an 80% gross profit margin, no capex, and $400 million in earnings before interest, taxes, depreciation and amortization or EBITDA. The company also has $2.5 billion in net cash, 450 million users, and an enterprise value of 15 times cash flow. However, it is somewhat misunderstood by the market as it is often lumped together with unprofitable hyper-growth companies and unicorns. As such, it reached sky-high valuations (topping $80 per share) during the recent growth stock run and fell back below its $19 IPO price when the growth sector imploded. . It was likely overvalued at $80 per share, but even more likely undervalued at $20 per share.
It operates in social media and e-commerce, two areas in which Elliott has significant past experience as major active shareholders of Twitter and eBay, among others. Yet unlike its peers, Pinterest struggles to monetize its user base. But it is now at a point where everything can change. Until the end of June, the company’s founder, Ben Silbermann, was the CEO. He realized impressively that he might not be the best person to run a large-cap public company and stepped down as CEO to become executive chairman. The company named Bill Ready, who had been president of commerce at Google since 2020, to replace him.
Elliott’s investment is a sign of confidence in Ready’s ability to pursue several opportunities to better monetize the company’s user base. One such opportunity is to increase ad revenue in international markets where they get 10-20 cents per month per user, compared to dollars per month per user for companies like Snapchat and Twitter. The second opportunity to increase revenue is through better use of e-commerce on its platform. Pinterest partnered with Shopify in 2020, giving its users the ability to buy products they find on its platform by clicking a link to a merchant’s website. In June, Pinterest acquired The Yes, an artificial intelligence platform that personalizes the fashion shopping experience for users. Finally, it could expand its user base by having a wide range of male users, as they do internationally where users are more likely to use Pinterest for things like cars and sports.
Given their expertise and history, we would expect Elliott to seek a board seat here, as they did at eBay and Twitter. Years ago – and under different circumstances – this could have been seen as an attempt at confrontation. But several things indicate that this is an amicable engagement for Elliott. First, there’s a new, experienced CEO that Elliott seems to respect. Second, Ben Silbermann controls 37% of the voting shares through a two-class share structure that gives him 20 votes per share, so Elliott wouldn’t commit here if the company thought it would be divisive. There’s also reason to believe it’ll be amicable on Pinterest’s side as well. Elliott has earned a lot of respect from shareholders and directors in this industry since their time on the board of directors of Twitter and eBay, and the company is more likely to be given an amicable welcome to the board. administration than it would have been 10 years ago.
Although the primary focus here is operational, when an activist engages with a company it often puts that company in pseudo-game and attracts the attention of strategic investors and private equity. This will certainly be the case here. Last year, there were rumors that PayPal and Microsoft were interested in bidding for Pinterest, and that’s when the company had a valuation of around $50 billion against its enterprise value of approximately $9 billion today. Additionally, one of the reasons potential suitors haven’t historically sued Pinterest is the perception that its founder wouldn’t sell. With Silbermann stepping down as CEO, that may no longer be the case. We might see other interested parties. While Elliott is not advocating for a sale here, as an economic animal with fiduciary duties, if an offer were made they would certainly assure that the board was seriously considering it against a standalone plan to determine what is best for shareholder value. In fact, if that were to happen, we might even see Elliott’s private equity arm, Evergreen Coast Capital, teaming up with someone to assess a potential offer.
It has been reported that Elliott has a position of around 9% on Pinterest, which knowing Elliott, we would assume it is 9.9%. However, they are not a 13D filer. Based on their history and philosophy, this is likely due to the fact that Elliott uses swaps and other derivatives to supplement its position and these types of securities are not required to be included in the “property effective” for the purposes of 13D filings at this time. While this practice is currently the subject of a Securities and Exchange Commission proposal, and could very well change in the near term, at least for now, it opens the way for an interesting juxtaposition of shareholders here: a founder who has a 6.6% economic stake with 37% voting power versus an activist with a 9.9% economic stake but potentially negligible voting power.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and he is the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist investments 13D. Squire is also the creator of the AESG™ investment category, an activist style of investing focused on improving the ESG practices of portfolio companies.