Smoke and Mirrors: How Snap and Pinterest Hide User Attrition

Social media companies today are using smoke and mirrors to hide an important key metric. I’m going to pick on Pinterest first because the social media company recently revealed these issues in its S-1 Filing, and meanwhile, Pinterest stock saw a 25% pop on the day of its public debut. To be fair, this 25% IPO pop pales in comparison to Snap’s 135% stock price increase from December lows.

My best guess is that investors are hoping for the next Facebook, or perhaps they aren’t reading beyond the financials, which are on page 13 of the prospectus, compared to the social media metrics located on page 70. This is one reason I recommend following an unbiased tech analyst, such as myself, to avoid reading long S-1 filings 

As important as the financials are to the value of the stock, they can be misleading when not accompanied by scrutiny of the underlying business. For example, there are a couple of terms that are important to social media growth. I italicized growth because I presume investors will demand growth at both Pinterest and Snap’s outsized valuations. The first is monthly active users (MAU) or daily active users (DAU). The second is average revenue per user (ARPU). On the surface, Pinterest has healthy MAU numbers with 265 million monthly active users in the most recent quarter. For comparison, Snapchat has about 300 million MAU and Twitter has just over 325 million as of Q4 2018.

In regards to ARPU, a company with a healthy metric would be Twitter, for example, which has an average revenue per user (ARPU) of $9.48 and the revenue is split roughly 50/50 between international users and domestic users in the United States. For instance, in the most recent quarter Q1 2019, Twitter generated $317 million globally and $363 million in the United States. Contrast this with Pinterest and Snap with ARPU in the $2-$3 range. Investors in both Pinterest and Snap are speculating these social sites can increase ARPU significantly – meanwhile, there are issues of attrition in Pinterest’s and Snap’s user base.

(See more on Snap below, which reports earnings today.)

PINTEREST – CAN’T MONETIZE GLOBALLY

One issue with looking at ARPU holistically is that not all regions are created equal. This is especially true for monetizing on mobile. The United States spends a lot of money on social media compared to other regions, while Europe spends a reasonable amount of money. Other regions, such as India, spend very little money and can actually cause a social media company to lose money as providing a free service to users who do not monetize well – by advertising or purchases – creates low to negative operating margins. (You may be able to tell that I am foreshadowing here.)

Pinterest has monetized the United States beautifully. The 80 million or so users in the United States generate $9 average revenue per user. We see evidence this is saturated, however, as the user growth has been stagnant for many quarters.

Venture capitalists like to see 10% month-over-month growth with mobile application users or website users. (Actually, the prefer to see 30% month-over-month growth). Pinterest has struggled to achieve 10% year-over-year growth in the United States with some declining quarters.

However, Pinterest has achieved a 10% QoQ benchmark globally – and this graph looks much better. But there’s a catch …

Here’s the problem. The international audience doesn’t monetize. The regions where Pinterest is growing are only monetizing at 25 cents per user annually, which is not enough for a profit margin let alone an operating margin.  Compare this to the $9 average revenue per user in the United States, and you can see why the average ARPU for Pinterest drops significantly to $2-$3 annually.

To put it simply: the high average revenue per user regions have flat to declining growth (United States) of 80 million to sometimes 75 million, while the regions with adequate growth are not contributing to profits. If you are invested in Pinterest, you are either:

1. Betting the United States will monetize higher than $9 per user – which is possible as Facebook is peaking at $26-$28 per user but all other social media platforms have hit a ceiling at $9 per user. (Facebook also uses data in questionable ways, which I’ve covered extensively from an ad-tech level, and California has numbered those days by passing laws for 2020).
2. Betting the global audience will monetize higher

In the last quarter, the global audience contributed $17 million to revenue compared to $273 million from the United States audience. Annually, this puts the global audience at $41 million in revenue and the United States at $715 million in revenue.

Takeaway on Pinterest: On one hand, you could congratulate Pinterest on monetizing the United States users very effectively – although I am not certain how much more they can squeeze out of this audience as the user growth has stalled. I like to keep things fairly simple – if the numbers don’t add up, then I don’t invest. In this situation, the average revenue per user (ARPU) of the growing audience (global) is too low to turn a profit at 25 cents ARPU and the audience that is monetizing (United States) is stalled.

SNAP – FLAT TO DECLINING USER BASE

My thoughts on $SNAP:

Snap is priced to perfection as the “largest U.S. company to have more than doubled in 2019” with a rise totaling 135% in the last six months from a low of $4.99 on December 21stto $11.75 going into earnings. The speculation around this stock is in sharp contrast to the declining user base from previous quarters in 2018.

You’ll see below that the user base has struggled to break out over 191 million daily active users and has declined to flat for three straight quarters. Meanwhile, the stock has outperformed the S&P 500 10x in the last three months. It bears mentioning the business of social media is virality and engagement, and therefore, the user base is a paramount metric.

On April 4th, Snap announced a programmatic offering called Audience Network, which copies Facebook’s strategy of selling user data for third-party ads across multiple applications (Snap even copied the name – that should be interesting for trademark attorneys). Snap’s Audience Network could revive revenue in future quarters, however, the user base will continue to be a problem as there is a competitor from China, TikTok, that is taking market share of the Millennial audience. For specific months last year, such as September 2018, TikTok beat Facebook, Instagram and YouTube as the number one downloaded app.

Keep in mind, Snap’s user base is more transparent for analysis purposes than Pinterest, as the latter hides their stagnant domestic growth with 25-cent global growth. Overall, attrition in the regions driving revenue typically doesn’t make for a good investment in mobile or internet companies where audience is everything.

Regarding Snap’s earnings today, I’d keep a close eye on the declining to flat user base – regardless if they beat or miss on revenue. In the future, Snap’s Audience Network may help revenue quite a bit, but it will be short lived as California passed the California Consumer Privacy Act that go into effect in 2020 – more on this later.

Update: On April 23rd, 2019, Snap reported 190 million DAU which is a 1 million user decline from year-ago quarter of 191 million DAU.