Business Strategy and Outlook Ali Mogharabi, Sr Eq. Analyst, 08 July 2020 Pinterest, an online product and idea discovery company , is focused on carving out a piece of the global digital advertising space. While we don't expect Pinterest to displace online advertising behemoths Google and Facebook or up-and-coming Amazon, we do expect it to attract a small pinch of digital ad spending, which we estimate is an addressable market of nearly $500 billion. Pinterest has a narrow economic moat and stable moat trend based on network effects and intangible assets (data), which we think can eventually drive the company to profitability and excess returns on invested capital. With more than 365 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 firm 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. W e think opportunities exist for the firm to gradually increase its share of the U.S. digital advertising market, as well as grow internationally (mainly in Europe) in terms of both users and ad dollars collected from this audience. As a platform for content sharing, a big risk for Pinterest is that the firm is susceptible to blame for spreading misinformation via pins. Additionally , by having an international audience, Pinterest is subject to Europe's General Data Protection Regulation. Still, there has been little public outcry based on how Pinterest uses pinners' data and whom this may be shared with. Analyst Note Ali Mogharabi, Sr Eq. Analyst, 31 July 2020 Pinterest's second-quarter results beat our projections and the FactSet consensus estimates as strong user growth during the pandemic more than offset softer user monetization. The stay-at-home trend brought on by the COVID-19 pandemic continues to benefit Pinterest and its peers as more consumers are spending more time online. In addition, user engagement has remained above Important Disclosure: The conduct of Morningstar’ s analysts is governed by Code of Ethics/Code of Conduct Policy , Personal Security T rading Policy (or an equivalent of), and Investment Research Policy For information regarding conflicts of interest, please visit http://global.morningstar .com/equitydisclosures Pinterest Pins Successful Q2 and Guides for Strong Q3; Raising FVE to $31 Bulls Say O Pinterest can increase user monetization with better shopability of the platform, from live pricing to visual searches. O Pinterest’ s user growth increases as its market increasingly prefers platforms that place high importance on data protection and filtering fake news. O Pinterest still has room to attract a wider base of users, potentially increasing the platform’ s appeal to advertisers. Bears Say O Instagram is a formidable social network that could poach Pinterest users as it releases its Pinterest equivalent, Collections, and expands its visual search capabilities. O Pinterest cannot effectively monetize its international user base after years of near ad-less feeds for those users. O T ight e-commerce competition could lead to a hefty spike in R&D expense that doesn’ t pay off. Morningstar Pillars Analyst Quantitative Economic Moat Narrow Narrow V aluation QQQ Fairly V alued Uncertainty V ery High High Financial Health — Moderate Current 5-Yr A vg Sector Country Price/Quant Fair V alue 0.95 — 0.84 0.83 Price/Earnings — — 15.3 20.1 Forward P/E -1.0 — 14.6 13.9 Price/Cash Flow 590.4 — 6.0 13.1 Price/Free Cash Flow — — 15.6 19.5 T railing Dividend Y ield% — — 4.22 2.35 pre-pandemic levels even after some of the lockdowns were eased. Plus, most of the users on Pinterest are shopping, which helps the firm’ s direct-response ads generate attractive returns on investment and brings more advertisers on board. All of this clearly displays Pinterest’ s network effect moat source. Management guided for third-quarter top-line growth in the mid-30s (significantly above consensus estimates) as it expects user growth and monetization to strengthen. W e increased our projections for this year and next and continue to expect GAAP profitability in 2023. Adjustments to our model resulted in a $31 fair value estimate, up from $27. The stock now appears fairly valued as it spiked more than 30% in reaction to the strong second quarter and guidance. T otal revenue of $272.5 million was up 4%, driven mainly by a 39% year -over -year increase in monthly active users to 416 million. Overall user monetization declined nearly 21% from last year mainly due to the 11% decline in average revenue per user in the United States, compared with a 27% increase in the international markets. W e expect user monetization to increase in U.S. during the remainder of 2020, assuming improvement in the state of the economy , a shift of some of the Facebook boycott ad dollars to Pinterest (as we published in our June 29 note), and more advertisers seeking additional platforms for direct-response campaigns. Economic Moat Ali Mogharabi, Sr Eq. Analyst, 31 July 2020 W e view Pinterest as a narrow-moat firm. W e believe Pinterest has displayed a network effect among its users and has begun to compile valuable intangible assets, or user data, both of which we think it can effectively monetize and generate return on invested capital for at least 10 years. Indications of the network effect and intangible asset economic moat sources include Pinterest's user growth (although we expect such growth to decelerate) and increase in average revenue generated per user through advertising. W e think these trends will continue, which will lead to operating leverage, future profitability , and excess return on invested capital over time. W e think Source: Morningstar Equity Research Source: Morningstar Undervalued Fairly V alued Overvalued Quantitative V aluation i USA PINS Morningstar Equity Analyst Report | Report as of 31 Jul 2020 08:46, UTC | Page 1 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Pinterest's strategy is on the right track and there is room in the digital advertising market for Pinterest to grow and become profitable. In our view , while Pinterest's user count is not as impressive as that of Facebook or Instagram, the understanding that it is not just another online social platform, it is not a similar passive medium, and its users come on the platform with the purpose of finding ideas or products will help the firm attract ad dollars. Pinterest accommodates an average of around 250 million users, or pinners, per month who are in search of pictures or videos of various products or ideas (or discovery , as the firm refers to it). Discovery items may include fashion, products to help remodel homes, recipes, and much more. Pinners may also be willing to post pictures and videos about those products and ideas. Pins posted by the pinners can be grouped and saved on what the company calls boards. Every user can view such user curated content--the boards or the individual pins. In addition, based on what users may view as helpful or influencing ideas, they can follow other users or their boards. As more users post pins or save pins on their boards, other users benefit as they come across more products and ideas that help answer their questions, creating a network effect. While historical data is limited, we think that growth in Pinterest's monthly active users, from 128 million in the first quarter of 2016 to 265 million in the fourth quarter of 2018, displays the network effect. Growth in pinners has decelerated, which is likely to continue; however , the monetization of Pinterest's users is expected to improve. Pinterest monetizes its users and generates revenue by selling ad space to advertisers. In our view , the simple interaction and exchange of ideas based on products and ideas among Pinners creates the word-of-mouth marketing, which is considered effective by advertisers. This gives Pinterest and its advertising clients a better idea about user interests or tastes, which creates what Pinterest refers to as the T aste Graph. Analysis of T aste Graph data helps Pinterest and advertisers post more relevant and effective ads, or Promoted Pins, which may generate attractive conversion rates. Whether a pinner Close Competitors Currency (Mil) Market Cap TTM Sales Operating Margin TTM/PE Alphabet Inc GOOGL USD 1,047,796 166,677 21.36 33.90 Facebook Inc FB USD 669,033 73,357 36.21 28.65 Snap Inc SNAP USD 32,925 1,924 -56.11 0.00 T witter Inc TWTR USD 28,812 3,480 7.62 0.00 immediately takes action or not, in our view advertisers still benefit as they can retarget the same users in the future, further increasing conversion rates. Advertisers could be drawn to the Pinterest platform as the number of users and, more important, content posted by the users increases. While the firm will be competing with digital advertising giants like Google, Facebook, and more recently Amazon, we believe it can attract enough advertisers or ad dollars to become profitable and generate excess return on invested capital. Pinterest can attract various types of ad campaigns through the marketing funnel--from broad exposure or awareness to targeting and actual conversion. This is mainly due to two things. First, pinners access the app or website with the purpose of finding different types of products or ideas. Second, the likelihood that pinners' intentions as they save, post, and exchange pictures and videos of various products are to make purchases, quickly or at some point in the future, is high. Such a social commerce platform could help advertisers to not only introduce brands or new products to the nearly quarter of a billion pinners, but to also target various groups with specific products for immediate purchase on the app. Based on growth in user monetization, or average revenue generated per user , it appears that Pinterest's platform is attracting ad dollars. W e also think Pinterest's more innovative features have attracted retailers and direct-to-consumer brands to purchase ads on the platform. Some of those features include Product Pins, Shop the Look, and visual search tool Lens. Product Pins are basically native ads that contain pictures or videos of products and services with real-time availability and pricing updates, along with purchasing capabilities. Many retailers post those pins in order to make the purchase much easier for the pinners by avoiding the hassle of going to the retailer's website. Shop the Look is more of a social feature as it identifies different products within pins that are for sale and users can purchase. When a user clicks on a product in a pin, Pinterest returns pictures of similar products with information about price and availability Lens, which can be combined with text search, is Pinterest's most innovative and interactive tool, in our Morningstar Equity Analyst Report |Page 2 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? opinion, as it helps users focus on any product in a pin and asks Pinterest to conduct a visual search and bring back pictures or videos of similar products. Some of those visual search results could be purchased right away , while others could be images of similar products that Pinterest's machine learning-based visual search technology (which includes image recognition) identified as relevant for the user to see or explore. Pinterest's Lens and the technology behind it also allow users to activate the camera on their mobile device, focus on any product around them, and conduct a visual search for similar products automatically on the app. Facebook acquired a company providing similar visual search technology , GrokStyle, in early February Google, Amazon, and eBay are also making investments in visual search. Pinterest is also using QR codes along with its own version, referred to as Pincodes, to help consumers not only receive more information about products while in stores but also find similar products possibly provided by other retailers or brands. Fair V alue & Profit Drivers Ali Mogharabi, Sr Eq. Analyst, 31 July 2020 Our fair value estimate is $31 per share on a fully diluted basis. This represents an enterprise value/sales multiple of 8 in 2020. W e have modeled 26% and 20% 5- and 10-year compound annual growth rates for revenue, which results in revenue of $3.6 billion in 2024 and $7.1 billion in 2029. By 2029, we estimate Pinterest will have approximately 1%-2% of the global digital advertising market. Overall growth in digital advertising plus the firm adding more advertisers and the sale of more ad inventory should drive our growth estimate. While pinner growth will also be a driver , in our view , it will be decelerating, as we don't see much upside in U.S. user growth, which will be offset by continuing growth internationally W e estimate that average total users will grow to over 650 million by 2029 from 335 million in 2019, representing average annual growth of 8%. In our view , given that most Pinterest users access the app with the intention of finding various products or ideas, which could result in high ad conversion rates for Pinterest and advertisers, monetization of pinners is likely to outpace user growth after the COVID-19 pandemic. W e anticipate average annual revenue per user to increase at a 12% CAGR through 2029. Due to the consumption-driven economy in the U.S., we expect the ad dollars allocated to Pinterest to grow in the U.S. despite the firm's decelerating U.S. user count. Growth in international users, led by Europe, will also be accommodated by higher average revenue per international user With strong top-line growth and Pinterest's network effect and data economic moat sources, we expect gross margin and operating margin expansion during the next 10 years. As Pinterest enhances its ad selling system to handle more transactions in real time and to make it more programmatic, or "self-service," costs associated with ads sold will decline and gross margins are likely to expand. W e assume gross margins of 73% and 78% in 2024 and 2029, respectively , higher than the 68% earned in 2019. With strong top-line growth and gross margin expansion, along with the network effect moat source helping to generate operating leverage as revenue outpaces sales and marketing, we expect operating margin expansion to 33% by 2029 from operating losses in 2019. Risk & Uncertainty Ali Mogharabi, Sr Eq. Analyst, 31 July 2020 W e assign Pinterest a very high uncertainty rating given the company’ s fierce competition in winning ad dollars and the possibility of a rapidly changing e-commerce and social media landscape that could be difficult to which to adapt. Pinterest probably has a weaker social graph than Facebook or Instagram, which may create some difficulty for it to attract significantly more ad dollars consistently Advertising on social platforms is more effective if the recommendations, likes, comments, and other input come from trusted people. According to a survey conducted by Deloitte and published by eMarketer in October 2018, U.S. Internet users trust product recommendations by friends and family members, who probably spend more time on social networks like Facebook and Instagram, the most. As a platform for content sharing, Pinterest is susceptible to blame for spreading misinformation via pins. For instance, in February , Pinterest banned all searches related to antivaccination pins in order to avoid appearing to promote the lifestyle choice. V accinations aren't the only proactive measure Pinterest is for , however This ban differs from those by competitors like Facebook and T witter , because it was mainly proactive against harmful posts, given the little-publicized dissent against the Morningstar Equity Analyst Report |Page 3 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? antivaccination content before the ban. The ban was implemented out of Pinterest's post policy , formalized in 2013, which advocates against self-harm and health misinformation. Additionally , by having an international audience, Pinterest is subject to Europe's General Data Protection Regulation. Instapaper , a tool to save articles from external sites to read for later and formerly owned by Pinterest, was disabled for two months in 2018 in order to avoid noncompliance with GDPR, even though it had several years to adapt to the changes. Still, there has been little public outcry based on how Pinterest uses pinners' data and whom this may be shared with. Stewardship Ali Mogharabi, Sr Eq. Analyst, 08 April 2020 W e view Pinterest’ s stewardship of shareholder capital as Standard. Founded in 2010 by Benjamin Silbermann, Evan Sharp, and Paul Sciarra, the company has fared well even with departure of Sciarra, the former CEO. Silbermann, a former display ad designer at Google, is the current CEO of Pinterest. Sharp is also a Silicon V alley veteran as he worked at Facebook as a product designer before helping to start Pinterest. Sharp is currently the firm’ s chief design and creative officer W e think Silbermann, Sharp, and CFO/COO T odd Morgenfeld have done a fair job of expanding the monetization of the platform through wise investments in new technology , like visual search, and adding new features like live pricing. While our stewardship rating is Standard, we note that Pinterest’ s dual-class share structure limits the voice of other shareholders. Pinterest has a 20-1 voting ratio between Class B and Class A common stock. Silbermann and Sharp will have some influence over Pinterest, as they are expected to maintain their combined 13%-plus of voting power after the IPO. Ultimately , investors will be only slightly dependent on the decisions made by Silbermann and Sharp and whether they will help Pinterest generate exceptional returns for shareholders. Pinterest has not made any material acquisitions, and we do not foresee the company issuing a dividend anytime soon. Morningstar Equity Analyst Report |Page 4 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? Analyst Notes Archive Pinterest Ends a Successful IPO Y ear With a Strong Q4 As Users and Advertisers Jump on the Platform Ali Mogharabi, Sr Eq. Analyst, 06 February 2020 Pinterest’ s fourth-quarter results beat our projections and the FactSet consensus on the top and bottom lines driven by strong user growth and monetization. Pinterest’ s investments in not only improving the app's user interface but also creating new ad products for advertisers continue to pay off. The firm’ s latest financial results display what we had initially assumed, that Pinterest--a social network company with a network effect that can attract ad campaigns through the marketing funnel, from broad exposure or awareness to targeting and conversion--will attract advertisers. Management guided for 2020 revenue of $1.52 billion, or 33% growth, and flat to slightly higher adjusted EBITDA margin. W e do not plan to make material changes to our $24 fair value estimate for Pinterest. T otal revenue increased 46% year over year to nearly $400 million, driven by 26% growth in monthly active users, MAUs, and a 13% growth in average revenue generated per user , or ARPU. The firm’ s improvement in its app design, more focus on video content, and the availability of a lighter version of the app likely drove the increase in MAUs. W e think the strong growth in ARPUs is mainly due to the firm’ s continuing investment in enhancing its ad products, including data measurement and analytics, all of which have attracted more ad buyers. U.S. MAU growth remained in single digits but accelerated compared with last year At quarter’ s end, Pinterest’ s U.S. MAU count was 88 million, up 7%. Ad product enhancements helped the monetization growth in the U.S. outpace user growth significantly , as U.S. ARPU increased over 26% year over year to $4. International MAU increased 35% from last year to 247 million, while ARPU of those users surged 122% to $0.21. COVID-19 Will More Than Offset Pinterest’ s Strong Q1, but Shares Remain Attractive; Maintaining FVE Ali Mogharabi, Sr Eq. Analyst, 08 April 2020 While COVID-19 has lowered ad demand and prices at narrow-moat Pinterest (and at its social networking peers), the firm’ s network effect continues to strengthen, which may attract advertisers back to the platform when the pandemic subsides. On April 7, Pinterest provided an update on its first quarter , which included revenue that was in line with our internal estimate and above the FactSet consensus and a higher -than-expected user count. Plus, because of the uncertainty brought on by COVID-19, Pinterest withdrew its initial full-year 2020 guidance. W e have adjusted our projections and are maintaining our $26 fair value estimate, which continues to represent attractive upside. As COVID-19 continues to spread around the world and delay major events like the Olympics, we believe it will hurt ad spending. W e estimate overall ad spending will decline 15%-20% during 2020. Impact on digital ad spending should be less than on traditional, so we expect online ad spending to decline between 5% and 10% in 2020 but come back with a vengeance, driven mainly by economic recovery W e think the full-year effect of the lower overall online ad spending will be partially offset by Pinterest’ s strong first-quarter revenue and impressive user growth and the demographics of its users. Given the current quarantines and lockdowns, advertising for home decor , “athleisure,” and delivery services may not decline much. Plus, while companies in the travel and hospitality markets will continue to slash ad purchases, we think Pinterest users will keep attracting consumer -packaged goods brands, which are less likely to significantly cut ad spending during the pandemic. W e estimate a 1% decline in Pinterest revenue in 2020, followed by a 49% increase in 2021, which will be driven by an increase in ad inventory and prices. As a reminder , before the coronavirus outbreak, the firm was far from maximizing user and app monetization, as it had not yet begun to increase its ad loads. Pinterest’ s Q1 Margins Pressured, but More Users Continue to Onboard; Maintaining $26 FVE Ali Mogharabi, Sr Eq. Analyst, 05 May 2020 Pinterest reported mixed first quarter results with revenue exceeding our internal projection and the FactSet consensus, while profits slightly missed expectations. While the impact of COVID-19 on ad spending partially offset Pinterest’ s impressive quarterly user figures, the firm maintained strong double-digit revenue growth, within the guidance range provided on April 7. In our view , Pinterest’ s user growth will strengthen the firm’ s network effect moat source as it will attract more advertisers during an economic turnaround. W e are not making any Morningstar Equity Analyst Report |Page 5 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? significant adjustments to our revenue projections but we are lowering our margin assumptions due to weakness in user monetization during the current pandemic. W e are maintaining our $26 fair value estimate. While the stock had jumped more than 90% since its year -to-date lows in mid-March, it is paring some of those gains, trading 17% lower in after -hours. In our view , Pinterest shares have again become attractive. T otal revenue came in at $272 million, up 35% year over year , driven mainly by 26% growth in monthly average users and a 6% increase in revenue generated per user While user growth stayed comparable with prior quarters, monetization decelerated significantly (compared with 26% in first quarter 2019). The current pandemic reduced advertising demand but did attract more users to the platform. According to the firm, engagement among users also increased, which allowed Pinterest to sell more ad inventory but at lower prices. While overall demand from advertisers declined, advertising by consumer -packaged goods partially offset cuts by companies in the retail, travel, automobile, and restaurant sectors, similar to what we mentioned in our April 8 note. Advertising W alkout on Facebook and Other Social Media Gains Momentum; Pinterest May Benefit Ali Mogharabi, Sr Eq. Analyst, 29 June 2020 Over the weekend, more large brands and advertisers, including Coca-Cola, Starbucks, and Unilever , announced plans to pause or reduce ad spending on social media platforms (mainly Facebook and its Instagram platform) in protest against the lack of controls to limit hate speech and misinformation. The movement, which began on June 17, has gained momentum, increasing the risk for firms such as Facebook and T witter , while possibly creating some opportunities for Pinterest and Alphabet. However , we anticipate that most of the advertisers will return to Facebook given its more than 2.6 billion users. In the meantime, Facebook can take steps to demonstrate it will reduce hate speech further on the platform; although more content oversight could bring more regulatory risks to the forefront. With the current advertiser walkout, we have not changed fair value estimates for the social media companies under our coverage. W e value Facebook, T witter , Snap, Pinterest, and Alphabet at $215, $30, $17, $26, and $1,400 per share, respectively W e continue to view Facebook, T witter , and Alphabet as fairly valued, while Snap remains overvalued. The recent sell-off in the social media names has made Pinterest, which is approaching a 4-star rating, attractive. Pandemic Not as Severe on Digital Ads; Raising Alphabet, Facebook, Pinterest, Snap, and T witter FVEs Ali Mogharabi, Sr Eq. Analyst, 08 July 2020 W e have increased our estimates for Alphabet, Facebook, Pinterest, Snap, and T witter , as the coronavirus-related hit to digital advertising looks softer than we initially anticipated. W e think advertisers will continue to allocate more of their ad dollars toward direct-response campaigns after the pandemic. The main beneficiary of what may become a lasting change is likely to be Facebook. Investments by Pinterest and Snap to enhance their direct-response offerings will probably partially offset the impact of lower spending on broad-based campaigns. The same could be true of T witter , but to a lesser extent. At Google, we expect search to attract more advertisers, given the overall decline in ad prices. Plus, assuming no significant lockdowns by the second half of 2021, we expect Google and Snap to more effectively monetize their map apps. The adjustments to our projections lift our fair value estimates for Alphabet 9% to $1,520, Facebook 14% to $245, Pinterest 4% to $27, Snap 6% to $18, and T witter 7% to $32. Digital ad spending in the second half of this year is likely to be higher than the same period of 2019. According to a survey of advertisers conducted by the Interactive Advertising Bureau in mid-June, more ad buyers said they plan to increase ad spending on social media and paid search than to not change or decrease their spending during the next six months compared with last year The survey also showed that the increase will likely come at the expense of cutting spending on traditional advertising. The survey also indicates that advertisers may increase their social media and paid search spending by at least 25% and 20%, respectively , from the second half of 2019. Earlier this month, eMarketer also published its latest estimates for 2020 digital ad spending, which it now believes will increase 2% year over year , well above our initial projection in March of a 5%-10% decline. Pinterest Pins Successful Q2 and Guides for Strong Q3; Raising FVE to $31 Ali Mogharabi, Sr Eq. Analyst, 31 July 2020 Pinterest's second-quarter results beat our projections and the FactSet consensus estimates as strong user growth during the pandemic more than offset softer user Morningstar Equity Analyst Report |Page 6 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020. All Rights Reserved. Unless otherwise provided in a separate agreement, you may use this report only in the country in which its original distributor is based. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided solely for informational purposes and therefore are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. The opinions expressed are as of the date written and are subject to change without notice. Except as otherwise required by law , Morningstar shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information contained herein is the proprietary property of Morningstar and may not be reproduced, in whole or in part, or used in any manner , without the prior written consent of Morningstar Investment research is produced and issued by subsidiaries of Morningstar , Inc. including, but not limited to, Morningstar Research Services LLC, registered with and governed by the U.S. Securities and Exchange Commission. T o order reprints, call +1 312-696-6100. T o license the research, call +1 312-696-6869. Please see important disclosures at the end of this report. ? monetization. The stay-at-home trend brought on by the COVID-19 pandemic continues to benefit Pinterest and its peers as more consumers are spending more time online. In addition, user engagement has remained above pre-pandemic levels even after some of the lockdowns were eased. Plus, most of the users on Pinterest are shopping, which helps the firm’ s direct-response ads generate attractive returns on investment and brings more advertisers on board. All of this clearly displays Pinterest’ s network effect moat source. Management guided for third-quarter top-line growth in the mid-30s (significantly above consensus estimates) as it expects user growth and monetization to strengthen. W e increased our projections for this year and next and continue to expect GAAP profitability in 2023. Adjustments to our model resulted in a $31 fair value estimate, up from $27. The stock now appears fairly valued as it spiked more than 30% in reaction to the strong second quarter and guidance. T otal revenue of $272.5 million was up 4%, driven mainly by a 39% year -over -year increase in monthly active users to 416 million. Overall user monetization declined nearly 21% from last year mainly due to the 11% decline in average revenue per user in the United States, compared with a 27% increase in the international markets. W e expect user monetization to increase in U.S. during the remainder of 2020, assuming improvement in the state of the economy , a shift of some of the Facebook boycott ad dollars to Pinterest (as we published in our June 29 note), and more advertisers seeking additional platforms for direct-response campaigns. Morningstar Equity Analyst Report |Page 7 of 15 Pinterest Inc PINS (XNYS) Morningstar Rating Last Price Fair V alue Estimate Price/Fair V alue T railing Dividend Y ield % Forward Dividend Y ield % Market Cap (Bil) Industry Stewardship 31 Jul 2020 20:43, UTC 31 Jul 2020 31 Jul 2020 20:33, UTC 31 Jul 2020 31 Jul 2020 31 Jul 2020 QQQ 34.29 USD 31.00 USD 1.11 — 0.00 14.77 Internet Content & Information Standard © Morningstar 2020.