In this weekly video portfolio manager Gareth Brown talks to International Shares Fund analyst Chloe Stokes about social media stocks. While U.S. social media giants such as Facebook and Snapchat reported first quarter results that exceeded expectations, social media investments in the International Shares Fund portfolio didn’t do as well.
Find out some of the factors that contributed to both Pinterest and Twitter stocks falling short of market expectations in addition to why the team still thinks these companies have a lot to offer despite their post-earnings plunge.
Hi I’m Gareth Brown. Today I’m joined by Chloe Stokes who works with me at the Forager International Shares Fund. We’re here today to talk all things social media. We’ve had a couple of the big US giants reporting in the last few days and some really good numbers. Facebook revenues were up 48% year on year in the first quarter, and we’ve also seen some good daily active user growth at Snap. Our two bets in the sector are Pinterest and Twitter, and they haven’t surprised the upside to the same extent. Let’s start with Pinterest. What was the market expecting?
I think what the market was expecting that they didn’t get was higher growth in US users. Management announced that they expected users to be flat in the US in the next quarter, which is unfortunate. Of course we would love for US users to keep growing and growing. But the fact of the matter is that most Pinterest users are women and almost half of all women in the US already use Pinterest. So there’s only so much we can expect from that US user base.
They had a huge tail wind last year with COVID. A lot of people came on and probably brought a couple of years of growth forward.
Exactly, and it’s a project based platform. So people are on there doing their home renovations or looking at home decor ideas, which as we know, was extremely prevalent throughout COVID. Once lockdowns are released and people are outside doing other things, of course they’re going to be spending less time on the platform, planning out their homes and things like that.
Were there any positives in the results?
I think so, I was very impressed with the average revenue per user. That’s grown really significantly recently, and it’s a key part of our investment thesis. Historically, Pinterest has really focused on growing that user base and getting engagement up. So people are on there gaining inspiration for their Pinterest boards, but they’re not necessarily making Pinterest any money. Pinterest isn’t serving them ads and there aren’t many shoppable links on there. We’re starting to see some real traction in that area. As I said, it’s a key part of our investment thesis so we’re really happy with that. And international growth in users is still going really well as well.
And what are we looking for going forward?
I think just more of the same. We want to see revenue per user going up. We want to see shoppable links on the platform, much more than what we’re seeing now. I’m not sure if you use Pinterest, but I do. And when I’m scrolling through the pictures, I find a lot of inspiration, but I find it quite hard to actually buy the products or sometimes even see where they’re from. So you want to see more of that, more growth in the international user base, and we want to see that US space either growing slowly or at least kind of stagnating. We don’t want to see it shrinking, but I don’t think we’re expecting too much from that in the future because so many women, especially in the US, are already Pinterest users.
It’s a story about increasing revenue per user in the US rather than total number of users.
Exactly. And we had Twitter report as well Gareth, and the market was also unhappy with that one. So what happened there?
I thought there was plenty to like in the result. User growth is running at about 20% per annum at the moment. We’re expecting that to slow down over the course of this year, maybe to 10% to 12% over the next three quarters and then accelerating again once we get past digesting the big growth in COVID users in 2020. Revenue was up 28%, management has guided for 25% plus growth for the next three quarters. So it’s definitely not terrible.
So why have a selloff then?
Twitter had a great Q4 last year and a really informative analyst day a few months ago. With the benefit of hindsight, expectations were pretty high going into this result and maybe they disappointed a little bit. As I said, we’re expecting 25% revenue growth over the course of this year and management has guided that revenue is expected to outpace cost growth over the balance of the year. So some sort of margin expansion, Q1 wasn’t great, but Q1 rarely is for this business. It’s a business that’s been delivering new products at a really hectic pace. That’s been part of our thesis and it’s just going to take a bit more time to get into the financial results. Ned Siegel, the CFO was on a chat after the results and he said, look, it’s really hard to measure the performance of a three-year turnaround 70 days into it. I think we need to be patient here and give it time and maybe revisit the thesis 6, 12 months down the track.
Thanks Chloe and thanks everyone for listening. Both these stocks are in the sin bin at the moment, but we do think our thesis is intact and we’ll be watching closely in the months and years ahead, look out for more information on social media and other stocks in our coming April monthly report.
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