2023-07-06 14:26:51 ET
Summary
- Pinterest presents a compelling investment opportunity with improving financials and a stock that has largely remained stagnant.
- The presence of activist shareholder Elliott Management and the absence of debt add to the appeal of investing in Pinterest.
- The company's focus on its commerce opportunity is gathering steam, signaling potential growth and diversification beyond advertising.
- Upcoming earnings season could provide a clearer picture of its potential.
Investment Thesis
Pinterest ( PINS ) has the makings of a compelling investment.
As a recap, Pinterest's financials will be improving in any case as the comparables with the prior year become easier. Also, you have a stock that is clearly off the lows but largely going nowhere. Plus, Elliott Management, an activist shareholder known for its aggressive tactics onboard. On top of all that, you have a business with no debt and more than 10% of its market cap made up of cash. And by the way, Pinterest makes strong free cash flows too.
And best of all? There's now increasing evidence that its commerce opportunity is gathering steam.
Here's why I'm bullish on Pinterest's stock.
Rapid Recap
Just over a month ago, when I penned Pinterest's Make-or-Break Moment: Innovating For Advertising Success, I said,
The future potential for Pinterest lies in unlocking monetization opportunities, particularly in ecommerce, to diversify its revenue stream beyond advertising
I then proceeded to say,
The future potential for Pinterest is in unlocking its monetization opportunities, particularly in commerce.
Pinterest's monetization strategy revolves around driving advertiser value, expanding shopping capabilities, and innovating ad formats to create a comprehensive advertising platform.
Since I wrote those lines, in the subsequent month, not one but two investing firms echoed my stance, that Pinterest commerce experience is the catalyst the business requires.
And with Pinterest's shares rising in the past month, I declare that Pinterest's make-or-break moment is getting the benefit of the doubt from investors.
Why Make-or-Break?
Do you want to know the secret to investing? The bulk of the money is made in a change of story. This can either work when you are shorting a stock or going long.
What you want is to position yourself at the inflection of a changing story. This will not always work. And you'll make mistakes. Even Warren Buffett makes mistakes. But what you want is to go long companies where the underlying fundamentals are about to change in twelve months, but the story is stodgy, boring, and static.
Note the rules above, you don't want to go long an overhyped stock, because that's not boring and static. And you don't want to go long stocks that will ''eventually'' play out.
That's why when I invest, I have a rule that I only hold stocks for 12 months if they are not working. If things are working, then you can be a bit more flexible, after all, investing is an art and not a science.
But you need to be brutal with yourself, with no place for emotions. If you recognize that Pinterest prospects are on the cusp of breaking through, stick with it. But if it turns out that what you thought was Pinterest's fundamentals were about to inflect higher, but actually 12 months later it didn't work out, you cut it. With no remorse. Don't ever waste time. Don't waste capital. But above all, don't waste time. You can always make more money. You can't make more time.
PINS revenue growth rates
Let's get specific. What you see here is Pinterest as a business that's reporting mid-single-digit growth rates, right?
But what if when Pinterest reports its Q3 results, it provides guidance, that its e-commerce opportunities are starting to show some nascent opportunities? And combine that with the fact that Pinterest's comparables with Q4 of last year are really quite an easy bar to cross.
What you'll have at that stage is a business that is likely to have at least 4 consecutive quarters of accelerating growth rates, and most importantly, a fresh story. Can you see what's happening here?
Nothing has really changed. For all intents and purposes, Q4 was always going to be better than last year anyway. After all, the underlying consumer environment appears to be slightly better and less restrictive than it was last year. What's more, there's ample evidence that the advertising market has stabilized.
But this here is really the crux of the matter.
What you see above is that analysts following the stock are not upwards revising their targets. Typically, I would not go full into a position before analysts start upwards revising their revenue estimates. After all, I don't want to be fighting the sell-side, because I know from experience that is not worth the trouble.
But I would buy a small position, and if after this upcoming earnings season, I start to see analysts upwards revising their revenue estimates for Pinterest, then I would rapidly move to make it a full position. For me, a full position is about 5% to 6%, because I have 16 stocks in the portfolio.
The Bottom Line
Pinterest presents a compelling investment opportunity due to various factors.
The company's financials are expected to improve as they face easier year-over-year comparables.
The absence of debt and a substantial cash reserve contribute to the company's appeal. Pinterest also generates strong free cash flows.
The most exciting aspect is the growing evidence of Pinterest's commerce opportunity gaining momentum. Monetizing through e-commerce is seen as a catalyst for diversifying revenue beyond advertising.
If the upcoming Q3 results and guidance reveal nascent e-commerce opportunities, along with favorable year-over-year comparisons, Pinterest could showcase several consecutive quarters of accelerated growth.
While analysts' revenue estimates have yet to be revised upward, this may change in the future. Consider a small position now, with the potential to increase this position if revenue estimates are upwards revised and the fundamentals look supportive.
For further details see:
Betting On Pinterest's Make-Or-Break Moment