2023-09-01 07:27:35 ET
Summary
- Pinterest's growth rates have slowed, but its net cash balance sheet and reasonable valuation make it a worthy investment opportunity.
- The company has shown improving fundamentals, including 6% YOY revenue growth and increased monthly active users.
- Pinterest's partnership with Amazon and focus on monetization could sustain double-digit growth over the next 3-5 years.
Pinterest (PINS) is a stock that continues to befuddle investors. It isn't too hard to understand why: after heading into the pandemic as a high-flying growth stock, PINS has seen its growth rates contract as it laps tough comparables and deals with a tough macro environment. Management has pivoted by increasing their focus on driving profitability and margin expansion. While PINS is looking more and more like it is becoming just a "niche" social media platform, the net cash balance sheet and reasonable valuation make it a worthy investment opportunity as the company furthers its partnership with Amazon (AMZN) advertisements.
PINS Stock Price
PINS remains far below all-time highs, but I do not see the stock returning so quickly to those levels barring another tech bubble. The company's growth rate has decelerated too drastically to warrant a return to the high-growth multiples of the past.
I last covered PINS in June, where I rated the stock a buy on account of increased user engagement. The stock has retreated slightly since then even as the company is beginning to show improving fundamentals.
PINS Stock Key Metrics
In its most recent quarter, PINS delivered 6% YOY revenue growth, showing slight sequential acceleration.
2023 Q2 Presentation
Rather notably, PINS saw revenues from Europe accelerate 600 bps sequentially to 12%. PINS was able to grow its monthly active users ('MAUs') by 8% YOY, which management notes is the highest growth rate they have posted over the past 2 years.
2023 Q2 Presentation
While PINS saw its average revenue per user ('ARPU') decline by 1% YOY, that was mainly due to strong growth in lower ARPU Rest of World users. The more crucial US users saw ARPU grow by 2% YOY.
2023 Q2 Presentation
After seeing adjusted EBITDA margins contract in the first quarter, PINS delivered solid margin expansion, with adjusted EBITDA margin coming in at 15% in the second quarter.
2023 Q2 Presentation
PINS ended the quarter with $2.3 billion of cash versus no debt, with net cash making up over 10% of the current market cap. The company's strong balance sheet enabled it to complete its $500 million repurchase program, 12 months ahead of schedule.
Looking forward, management has guided for the third quarter to see "high single digits" growth, implying further sequential acceleration but notably not nearly as strong as that of Meta Platforms (META). It appears that the tough comparables have finally turned from headwinds to tailwinds.
On the conference call , management discussed how the use of AI models has enabled it to achieve a "5% reduction in cost per action and over 10% lift in click-through rates." Given that PINS does not see the same level of engagement as that of META, it is not surprising that the company has seen a more modest impact from AI. That said, PINS continues to make progress in increasing the monetization of its app, with management noting that their partnership with AMZN is "progressing faster than expected." Management went on to share that they were "very pleased with the pace of implementation in Q2 and the early results of our testing in Q3 so far." The idea is that where PINS lacks in engagement, it makes up for with more valuable real estate from a consumer purchasing perspective - fully rolling out AMZN advertisements should go a long way in helping management achieve their goal of making their entire app "shoppable."
Is PINS Stock A Buy, Sell, or Hold?
As of recent prices, PINS traded hands at around 29x this year's earnings estimates. PINS is expected to grow earnings rapidly as management continues their margin expansion efforts.
Consensus estimates call for a return to double-digit top line growth over the coming years.
The stock continues to look buyable here, as the lack of debt and potential for continued acceleration in growth make for an attractive setup with the stock trading at under 30x earnings. One can continue to make the assertion that META may be offering superior value at 22x this year's earnings, but this report is not about META.
Unlike Snapchat (SNAP), which appears to be facing both issues with relevance as well as declining advertiser demand, PINS has somehow been able to show somewhat comparable user growth while demonstrating resilient advertiser demand in spite of the tough macro environment. I believe that this is due to PINS being a mission-driven application rather than one based on social interactions. The fact that users do not use PINS as frequently as SNAP is less relevant than the greater propensity for users to be searching for items to purchase. The long term growth story might not be 20+% growth over a decade, but I can see the Amazon partnership and other initiatives as helping to sustain double-digit growth over the next 3-5 years. Given the more mature growth profile, I could see PINS levering up its balance sheet much sooner than other tech peers, offering yet another near term catalyst.
What are the key risks? The risks here are easily seen when comparing their results to those of META. Whereas META is somehow increasing in relevance, the same can not so obviously be said at PINS. It is possible that PINS eventually sees user growth turn negative, which may more than offset any gains from increased monetization. PINS is likely exposed to any potential deterioration in the macro environment, especially given that it is unlikely to offset such headwinds with strong user growth. After seeing META launch Threads, their Twitter lookalike, it is possible that META attempts to do the same with PINS, though it is arguable that Instagram is the closest alternative and that has been a competitive threat that PINS has successfully dealt with for many years. PINS is not "dirt cheap" and can face considerable volatility, especially if margin expansion turns out to be slower than expected.
I reiterate my buy rating for the stock due to the net cash balance sheet, reasonable valuation, and prospects for accelerated margin expansion in the near term, but emphasize my continued preference for the stock of META.
For further details see:
Pinterest: 12% Net Cash, Rapidly Rising Profit Margins, GARP Valuation