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Under the temptation of profit, the CEO took the lead in fraud.

Author | Fusu

Editor | Xiaobai

Pinterest (PINS.N, “the Company”) is a social media platform in the United States that focuses on picture sharing. Users can use “pins” to pin their favorite pictures, videos and articles to a “PinBoard” for collection or sharing.

The company was founded in 2009 and listed on the New York Stock Exchange in April 2019 with an IPO valuation of approximately US$12 billion and a current market value of approximately US$28 billion.

In recent years, the company has achieved quite good growth.

In the first quarter of 2024, the company's disclosed revenue and monthly active users (MAU) both hit new historical highs: revenue of US$740 million, a year-on-year increase of 23%; MAU ​​of 518 million, a year-on-year increase of 12%.

(Source: Company 2024Q1 Press Release)

However, on July 21, Eastern Time, the company was attacked by the short-selling agency Grizzly Research (“Short-selling Agency”).

The short-selling agency said that under the temptation of huge profits from stock options, the company's CEO Bill Ready falsified MAU in order to raise the stock price.

Let’s take a look at this short report.

Overseas “fake orders” inflate MAU01Abnormal growth of MAU

MAU is the core operating indicator disclosed by the company, which is the basis of commercialization.

However, short-selling institutions believe that the company's recent MAU growth appears abnormal.

The company's recent MAU growth has mainly come from outside North America, while North America (including the United States and Canada) has always been the company's core market.

(Source: Statista)

Taking the first quarter of 2024 as an example, of the $740 million in revenue in that quarter, North America contributed $590 million (about 80%); Europe contributed $120 million (about 16%); and the rest of the world contributed $30 million (about 4%).

(Source: Company 2024Q1 Press Release)

Therefore, although the company continues to emphasize the growth of MAU, these new overseas users will not bring much value to the company's business.

As for the abnormal growth of MAU, short-selling institutions believe that this is mainly because the company "brushed orders" overseas to embellish its user data.

Click-farming refers to robots or "water army" clicking on designated websites or apps in large numbers at the instruction of their employers in order to achieve specific purposes.

Abnormal network traffic usually indicates the existence of "brushing" behavior.

Taking the UK as an example, before May 2023, the company's average monthly computer visits from UK users were between 7 million and 12 million, and the changing trend was basically synchronized with the average monthly mobile visits.

(Source: Grizzly Research)

From May 2023, the average monthly visits from the company's UK users on computers surged, reaching 45 million at its peak, creating an unprecedented gap with the average monthly visits from mobile devices. The above anomaly lasted until November 2023, and then suddenly disappeared.

Google Trends also pointed out that the company was suspected of recruiting "cheap water armies" overseas to fake orders.

Google Trends shows that in the past year, most of the regions with the highest search popularity for the keyword "Pinterest" are overseas low-income countries. The top five are: Azerbaijan, El Salvador, Indonesia, Cambodia, and Peru.

(Source: Grizzly Research)

02The real North American MAU has shrunk

What is the actual growth in users in the company's core market, North America?

Organic traffic is the free traffic that a social media platform receives through search engines such as Google, and can be used as an indicator of the popularity of the platform.

Third-party data shows that the company's organic traffic peaked in October 2020 and has continued to decline since then. By May 2024, organic traffic was only 30% of the peak period.

(Source: Grizzly Research)

In contrast, the organic traffic of other well-known American social media platforms, such as Instagram, TikTok, and Reddit, has not shown a clear downward trend over time, and the current organic traffic is still comparable to the peak period.

If measured by APP downloads, the company's performance is also poor.

In June 2024, the company's monthly APP download ranking was 39th, down 27 places from its peak. Both its current ranking and the decline in ranking are inferior to other well-known American social media platforms.

(Source: Grizzly Research)

Revenue shifts to extensive growth

Since the company's MAU is suspected of being fake, and the MAU in the core North American market is likely to have shrunk, why can the company still achieve revenue growth?

Almost all of the company's revenue comes from advertising, which is charged to advertisers.Short-selling agencies say the company continues to insert more advertisements into user search pages to increase revenue.

In the fourth quarter of 2023, the company's U.S. average revenue per user (ARPU) was $8.07, about double that of 2020.

Since ARPU reflects the advertising revenue each user brings to the company, an increase in ARPU actually indicates that users are being exposed to more and more advertising.

(Source: FourWeekMBA)

Although this method can increase revenue in the short term, it does so at the expense of user experience. In the long run, too many spam ads will also affect advertisers' willingness to place ads, thereby damaging the company's monetization capabilities.

Conversion rate is a key performance indicator for advertising. Third-party data shows that the company's conversion rate is low, at 2.9%, only higher than Twitter and far lower than Google (GOOG.O), Microsoft (MSFT.O), Facebook (META.O) and Instagram.

(Source: Novocall)

Due to the low conversion rate of the company's ads, its quotes are also at a low level among well-known social media platforms in the United States.

CPM (cost per thousand impressions) is a pricing method in the advertising industry, which means that advertisers pay fees when consumers see their ads.

According to third-party data, the company's CPM pricing cap will be $2 in 2024, significantly lower than Instagram's $4, Facebook's $3, and LinkedIn's $8.

(Source: WebFX)

CEO's personal interests are the motive for financial fraud

It is worth mentioning that the company has become an enterprise run entirely by professional managers.

In June 2022, the company's co-founder Ben Silbermann stepped down as CEO and was succeeded by Bill Ruddy, who had worked for Google and PayPal (PYPL.O).

As of now, Ben Silbermann and the company's other co-founder Evan Sharpe have sold all of their shares in the company.

Additionally, since 2020, company insiders have sold more than 25.4 million shares, with a total value of more than $1 billion.

Stocks and options account for the bulk of the new CEO Radi's salary structure.

It was disclosed that in 2022, Radi's annual salary was as high as 123 million US dollars, of which 101 million US dollars were stock options and the rest were mostly restricted stocks worth 21.5 million US dollars.

(Source: Company SEC filings)

As per convention, these stock options will be exercised in phases over the next four years.

According to the disclosure, the exercise price of Radi's options is $19.96. In other words, the value of his options depends on the remainder of the company's current stock price minus $19.96.Furthermore, if the stock price falls below $19.96, the option becomes worthless.

(Source: Company SEC filings)

In June 2022, the day the company announced the change of CEO, the stock price closed at $19.70. Since Radi took office, as the company's disclosed performance continued to set new highs, the stock price has also risen.

As of the close of Friday before the short report was released, the company's stock price closed at $40.78, far exceeding the strike price of the Lardy options.

Short-selling institutions believe that the huge profit temptation from exercising options is the motivation for the company's CEO to commit fraud.

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