On this week's episode of Industry Focus: Tech, we're checking back in on some of our old company pals from IF's recent past. What have Upwork (NASDAQ: UPWK), Pinterest (NYSE: PINS), and DocuSign (NASDAQ: DOCU) been up to since they went public? Host Dylan Lewis and Motley Fool Brian Feroldi find out (and give a quick refresher on how these companies work).
Pinterest, it turns out, isn't doing so hot, but don't give up on the social network just yet. DocuSign, on the other hand, has a much rosier outlook. Upwork, on the mutated third hand, does not; but hopefully time will bear this one out. Tune in to find out what's behind the numbers, what risks and prospects to watch closest, which of these three looks most exciting today, and more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 17, 2019.
Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Friday, May 17th. We're doing a little check-in on some companies that have gone public recently. I'm your host, Dylan Lewis, and I've got Fool.com's Brian Feroldi with me on Skype. Brian, what's going on?
Brian Feroldi: Hey, Dylan! I know that you as a big New England sports fan were thrilled to wake up this morning and learn that the Boston Bruins are heading to the Stanley Cup Finals. Is that correct?
Lewis: You know what, Brian? While I do not like the Patriots, and while you love to rub the Patriots' success in my face, I do like some of the Boston sports teams because I went to college in Boston. I have a soft spot for some of those teams. I'm a Red Sox fan. I'd say I'm a casual Celtics and Bruins fan. I like the old franchises. So while you're trying to gloat right now, I'm not going to let you have it. I'm going to be the bigger man and be happy!
Feroldi: That's wonderful! So glad that you know that you're a Bruins fan, too!
Lewis: [laughs] It's something that we can share. Clearly, you were busy last night watching the game.
Feroldi: I was, and it was a good night!
Lewis: Not so good of a day for a stock that you own, Brian! We're gonna be talking about a couple of different companies today that have gone public in the last year or so. This is my brief moment to rub something in your face. [laughs] Pinterest, a stock that we just talked about maybe a month ago, had a pretty rough first earnings report. This is our first look at them as a publicly traded company. The market didn't love the results.
Feroldi: Yeah, the market was definitely not happy with Pinterest's first earnings report. When a company is releasing earnings for the first time, it is really their chance to set the tone with how they will act and operate as a public company. The expectations were very high for Pinterest going in, and they did not meet expectations across the board. That was a little disheartening to see.
Lewis: Yeah, and it was surprising in some ways. I looked at a lot of the numbers here. Just over 50% revenue growth, they hit over $200 million in revenue, which slightly beat expectations. They showed some nice growth internationally. There's a lot of good signs there. It seemed like, though, this stock has gone quite a run, and the numbers weren't quite there to back it up. When you go up over 30% after your IPO [initial public offering], there's going to be a lot of expectations that you crush it in your first quarter, and we didn't quite get that.
Feroldi: Yeah, completely. As you pointed out, for listeners to know, this is a stock that went public at about $19. It popped and reached a high of $35 a couple of days ago. It was about $30 prior to this earnings report. And then when they reported numbers, it did decline by double digits in early-morning trading today. But context is everything, right? Even when it came public at $19, that was a higher number than its initial range. The valuation that was assigned to this stock was very high, I mean, 21 times sales prior to the earnings report. When you have that kind of valuation baked in, Wall Street wants a beat-and-raise, and they did not get it.
Lewis: Yeah. And the miss came on the bottom line. We saw net loss, about $41 million, which missed Wall Street's estimates. I think on a per-share basis, [it] came in at $0.33 per share, Wall Street was expecting $0.11. So you see some not-so-great headlines there: losses being triple what people were expecting. The reality, though, is gross margin expanded. Like I said, international's growing to be a larger portion of revenue, and that's where a lot of the user growth is coming from, so you're excited about that. I saw some pretty good signs here, especially with some of this stuff going on in the user side, Brian.
Feroldi: Yeah, I completely agree. This was not a miss across the board. There [were] a lot of numbers in here that I think do give bulls reasons to continue to be excited about this company. You mentioned ARPU, average revenue per user. That number came in at $0.73 for the quarter. That was up 26% year over year. That number is hugely driven by sales in the U.S. The number in the U.S. for the average user is $2.25. Compare that to international, $0.08. So this is very much a domestic revenue story at this point.
But as you pointed out, the user growth that we're seeing is almost all coming from international markets. We saw 6% user growth in the U.S. to 85 million monthly active users, and 29% growth in international markets for 206 million international users. The company still has a tremendous opportunity ahead to grow, both domestically, but especially internationally.
Lewis: Yeah. And I wouldn't be too discouraged with that $0.08 per user internationally. As we're seeing in management's commentary, they are still in their very early innings when it comes to monetizing their international audience. Just now after Q1 2019, they disclosed that they are advertising in 13 countries abroad for their international advertising efforts, up from seven in Q4. That really gives you a feel for how early on they are in this. I would expect, over time, that ARPU number from international to rise. It will always lag what goes on in North America, just because of the way the ad dynamics play out. But it'll start moving in the right direction.
Feroldi: Yeah, I completely agree with you there. To add some additional context about those numbers, again to $2.25 in the U.S., $0.08 internationally. Facebook is currently putting up $34 per user in the U.S., and $7.37 worldwide. That's not to say that Pinterest will ever be able to reach the numbers that Facebook can put up. But you can see that, between those two, there's likely to be a tremendous amount of room for Pinterest to continue expanding.
Lewis: I think part of the reaction also had to do with the fact that, you look out full year, we saw a big sticker number in that they'll be hitting over $1 billion in revenue. But the full-year guidance is going to be coming in a little bit lower than what Wall Street expected for the year.
Feroldi: Yeah. Pinterest's management team guided for about $1.07 billion in revenue for the year. That is slightly behind what Wall Street was expecting. The number suggested revenue growth of about 42%; that also might be a sticking point for Wall Street right now. Again, the company just put up 54% revenue growth in the first quarter. So that is not only a disappointing number compared to what Wall Street was expecting, but it does suggest decelerating revenue growth throughout the remainder of the year. So I do think that's adding some additional pressure to the stock today.
Lewis: Yeah, and when you're not profitable yet, and you're in growth mode, you've got to maintain growth mode. That's what keeps investors happy. That's probably part of the reason why we're seeing a little bit of a sell-off. I do think, though, big picture, looking at this report, looking at this business, it's more a case where the stock went on a big run after it went public, and now we're seeing a little bit of a curbing of the enthusiasm. People are coming back down to earth a little bit, rather than "these were terrible numbers" and the market thinks that this stock should feel bad about them.
Feroldi: Yeah, I completely agree. On the call, they also mentioned some things that I think investors should be excited about. For one, they just rolled out a feature where a business can basically now upload their entire product image catalog directly to Pinterest in one fell swoop, and basically get all of their products on Pinterest's site very easily. The company is also starting to make a push into video. Video has been tremendously popular for both [Alphabet's] Google and Facebook. They saw very high growth rates there. The advertiser count, too: They also said on the call that their growth rate of advertisers joining the platform accelerated in the first quarter. They wouldn't commit to an exact number; they don't release those numbers to investors. But just the fact that the number of advertisers going to their platform is accelerating, I think, is a very positive sign for this business. So, when I think of the big takeaway from this report, I think that overall, the fundamentals underneath the business are looking great. This to me was just a pure "management still has some work do with managing Wall Street's expectations."
Lewis: One thing that I do want to mention about this report before we move onto our next stock is: The results that we were looking at had shockingly low stock-based compensation for a company that just went public. I think [it] was about $1 million or something like that. That's because the results that we're looking at are from the quarter before Pinterest IPO'd. So, just keep that in mind, listeners, as you're looking at the financials here. The company will be recognizing a sizable chunk of stock-based compensation in the time to come. Just know that that hit is coming. It didn't come this quarter. It will show itself in future financials.
Brian, you bought into this stock shortly after the IPO -- I don't think day of the IPO. As an investor, you're feeling like, more wait-and-see, and adding to the position over time if the results are there?
Feroldi: Yes. As listeners may recall, Pinterest is one of my wife's favorite companies on Earth. She is a heavy user of the site. I have personally purchased many items directly off of things that I found on Pinterest. I still think that the platform has a tremendous amount of long-term growth. I bought it with the hopes of getting her excited a little bit about owning a stock. She's not somebody [who's] interested in the stock market at all, so this is a hopeful bridge there. But I did purchase shares. At current prices, I am down. That doesn't concern me at all; I am in this stock for the long term. And from what I saw in the earnings report, I still think that this is a stock that I do want to own for the very long term. But yes, out of the gate here, a little bit disappointed.
Lewis: Yeah, it sounds like you had that first slug, almost what I would call a tracking position in the stock. You have a little bit of money in there, you're keeping an eye on it, keeping tabs on what the results are going to be. I just recently went from having that type of position to adding to, getting that second buy, in a stock that I'm pretty excited about [that] also just reported earnings. That's DocuSign. This is one that we've talked about on the show before. I think this is probably a winner in the recent IPO space, Brian.
Feroldi: Yeah, I'm completely with you there. For those [who] need a refresher, DocuSign is the leader in the e-signature markets. Whenever you need to sign your name on any sort of document online, you use DocuSign. They've done a fabulous job in their first year as a public company. They have handily outperformed expectations all along the way. In the most recent quarter, we saw revenue growth of 34%. This is a company that's already at a decent scale, so that's an impressive number. If you dig a little bit deeper, subscription revenue growth -- which is the bulk of how this company makes its money -- that revenue growth rate was 37%. Subscription revenue growth is what we as investors should care more about, and that number was higher than total revenue growth. So that's very exciting to see.
The company is also making strides in international markets. This is still, just like Pinterest, very much a domestic story. But now, 17% of this company's sales are coming from international markets. Again, lots of room for growth here.
Lewis: Yeah. And looking at this quarter, I saw a lot of other good, less hard-number financial signs that things are moving in the right direction. We see them adding customers; they're now at just under 500,000 -- I think it's 470,000 customers. They've got some new partnerships with Salesforce. Everything that you see with this company when it comes to the employee satisfaction, the culture, is the stuff that you want in a company that you own.
Feroldi: Yeah, totally! This is a company that actually mentions their Glassdoor ratings up in the CEO's prepared remarks on the earnings call. That is something that is very rare. It's just so refreshing to see. We, as Foolish investors, love to see companies that have a great corporate culture and take their employee reviews and happiness very seriously. And that is just so apparent with DocuSign. To me, the big picture here is, this company still has a tremendous amount of room for growth ahead of it. They mentioned on the call, they still see their total addressable market at $25 billion. For context, they expect to post revenue this year of about $913 million. So lots to like in this stock.
Lewis: Scratching the surface, for sure. [Motley Fool analyst] Jason Moser was actually the one who really got me into this stock. Some combination of you and Jason Moser, Brian. I'm going to give you some credit there, too. I've been nibbling at it over time. A couple of weeks ago [I] added to my position. And I look at them, and it doesn't matter who you work with in the financials space, whether you're getting a mortgage, or you're doing something with Vanguard or whatever. It seems like they have the partnerships locked down for all these essential institutions that are heavily reliant on document management. And yet, they're still putting up pretty awesome growth, still bringing customers in. I think that's a sign that this company is here to stay, and one that is probably going to reward shareholders for quite some time.
Feroldi: Yeah, I completely agree with you. I think we're underselling the potential of this new salesforce.com partnership. Being directly integrated with a company like Salesforce, as they have been with so many other companies, makes the platform so much stickier, helps to bring their name out to so many more companies. When you see DocuSign sign partnerships with big-name platforms, that to me is a tremendous sign that this company can remain the top dog and leader in its industry for a long time to come. I think there's a lot to be excited about with DocuSign.
Lewis: All right, Brian, we have one more company we're going to discuss. I'd say DocuSign came home with an A on their report card. I would say that Upwork, another stock that I own, came home with a detention slip. [laughs] We have not seen very strong results from this business. You and I were talking before the show, just wrapping our head around what's going on here. The tailwinds seem so strong for this company, but the results haven't quite been there.
Feroldi: Yeah. Upwork, for those [who] don't know or need a refresher, this is the largest platform that connects businesses with freelancers. This is a company that we highlighted on our millennials show a couple of weeks ago, as a great stock to play the eventual rise of the gig economy. Upwork should be a natural winner here.
Unfortunately, as you preluded, the numbers that we're seeing out of this company are just not what you would expect for a company that should be in hypergrowth mode. Last quarter, we saw revenue grow 16%. That was a deceleration from the previous quarter. Now, there were some encouraging signs. Gross margin did expand to 70%. If you look at client spending retention rate, which is a key metric for software-as-a-service businesses like this, that grew to 107%. They are, of course, still losing money, but their net loss is shrinking. And they are spending on their platform. But to me, this is a company that should be posting minimum revenue growth of 20%. To see that number in the mid-teens, when they're still losing money, that's not something that gets me excited.
Lewis: Yeah. I want to double-click into those results there for a second. It was great to see client spend retention, which is basically them saying, "We had this customer base a year ago, we have them now, what are we getting from them in terms of dollar value compared to what we used to get from them?" [Retention of] 107% means they're getting 7% more money than they had from that same cohort of customers. You're getting better growth there. That means that they're either getting more usage or rolling new functionality into those accounts, and being able to upcharge them for that. But for growth to be dipping means that customer acquisition needs to be lagging, right?
Feroldi: Yes. I think that's completely right. If you look at the valuation that this stock now has on it, this is a stock that is currently trading at about 6.5 times sales. That's a very low number when compared to a lot of other SaaS [software as a service] growth companies that are posting much faster growth. This is a company that's been a disappointment since its IPO. The stock is actually currently at its all-time low since it came public. That pessimism is very much showing up in the share price.
Lewis: Looking at the full year, we're getting closer to the number that you'd like to be seeing for an early-stage SaaS company like this, where they're going to be somewhere around 19%. Ideally, we'd like to see it a little bit higher, because they're not profitable yet. It doesn't inspire the type of enthusiasm that you'd expect, because yes, this is the company, if you're talking about freelancers and connecting people across the world. It's not bound by geography. It seems like a no-brainer business for this tailwind. I hope that at some point, the numbers start to back that up.
Feroldi: Yeah. This, to me, is a great example of why it can make sense to take a wait-and-see approach to any new IPO. When we dug into the numbers behind this company on our breakdown of it, there was a lot to be excited about here. The natural tailwinds behind this company should be propelling very fast growth. But when you become a public company, things change. The culture changes. You suddenly have a number over your head. We do see Pinterest struggle with that right out of the gate. So that is a great reason to -- even if you're very excited about a business, right out of the gate -- buy your position out over time. Space it out. Or even take a[n] "I'm going to wait a quarter or two to see how this company reacts" approach. Upwork to me is the poster child of why you should take that approach.
Lewis: Last time that we talked about Upwork and DocuSign together, I put it to you and I said, which one of these two companies are you most excited about, would you most want to own? And you said DocuSign. I want to back it out now. We're talking about three companies here. We have Pinterest, DocuSign, and Upwork. You actually do own one of them. But making the decision today, which one are you most excited about, Brian?
Feroldi: I actually own Pinterest and DocuSign. If I had to rank them, I would definitely say DocuSign is my favorite idea here. I'm still bullish on Pinterest. I'm happy to remain a shareholder there. Upwork still has some proving itself to do to me before it would enter my portfolio. So if I had to rank them, I would say: No. 1: DocuSign; No. 2: Pinterest; No. 3: Upwork.
Lewis: Listeners, there you have it, power rankings from Brian Feroldi. Good luck to your Bruins in the Stanley Cup Finals!
Feroldi: Good luck to our Bruins in the Stanley Cup Finals!
Lewis: Our Bruins! [laughs] Sorry, Austin Morgan! The eternal hopeless [Capitals] fan. You had a good run last year, though.
Austin Morgan: We did have a good run last year. It made this year's loss hurt a little bit less, but it still hurt.
Lewis: I mean, you can't win every year. In fact, you can't win most years.
Morgan: Boston can! This is the third championship they're playing for in, what, nine months?
Lewis: Yeah, Boston's a title town, a bona fide title town.
Morgan: I can't wait until Boston sports go on a championship slump.
Lewis: It's going to happen eventually. I will say, I was spoiled when I was there as a college student. It was while the Pats were good, I think the Celtics won a championship, and I think the Bruins won a championship, all within the five-year period while I was in Boston.
Morgan: That's crazy! The entire time I've been born and alive in D.C., I've seen one.
Lewis: Yeah. It could be worse. There are a lot of other sports cities that have been starved far more than Washington, D.C. Well, enjoy watching the games, Brian! I wish you luck! I'll be rooting for you a little bit.
Feroldi: I'm so glad to hear that, Dylan!
Lewis: [laughs] Listeners, that does it for this episode of Industry Focus! If you have any questions, or you want to reach out and say hey, you can shoot us an email over at firstname.lastname@example.org, or you can tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes, or you can catch the videos from this podcast over on YouTube.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear.
Thanks to Austin Morgan for all his work behind the glass! For Brian Feroldi, I'm Dylan Lewis. Thanks for listening and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.
Brian Feroldi owns shares of GOOGL, GOOG, DocuSign, FB, and Pinterest. Dylan Lewis owns shares of GOOGL, DocuSign, FB, and Upwork. The Motley Fool owns shares of and recommends GOOGL, GOOG, DocuSign, FB, and CRM. The Motley Fool recommends Upwork. The Motley Fool has a disclosure policy.