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Pinning a Narrow Moat on the Pinterest Board

Profitability is in sight as we foresee Pinterest taking a pinch out of the global digital ad market.

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In our view, Pinterest (PINS), an online product and idea discovery company that generates revenue by selling digital ads, has an intrinsic value of $15 billion, or $22 per share on a fully diluted basis. The company is progressing toward an initial public offering by mid-April. After its last round of funding in June 2017, the company’s implied valuation was $12.3 billion, according to PitchBook. However, in its latest S-1 filing on April 8, Pinterest indicated an IPO price range of $15-$17; the $16 per share midpoint represents nearly an $11 billion market capitalization, below its last post-funding valuation. Assuming the IPO pricing remains in that range, we view Pinterest as an attractive investment opportunity.

We rate Pinterest as having a narrow economic moat and stable moat trend based on the network effect and intangible asset (data) moat sources, which we think can drive the company to profitability and excess returns on invested capital in the future. With more than 250 million average monthly users who access Pinterest with the intention of not only discovering ideas or products but also purchasing them immediately or in the future, we think the company can attract more online ad dollars. In our view, Pinterest can attract various types of ad campaigns through the marketing funnel--from broad exposure or awareness to targeting and actual conversion. We think opportunities exist for the company to gradually increase its share of the U.S. digital advertising market, after which, as its international users (mainly in Europe) increase, it will attract more ad dollars for that audience.

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Ali Mogharabi does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.