2023-06-28 12:40:36 ET
Summary
- Pinterest is rising on an analyst note citing increased engagement, which comes as the Amazon partnership is set to come online by the end of the year.
- The company is on strong financial footing, and management appears focused on driving further margin expansion.
- Positive momentum in the stock price is likely to be met with positive momentum in the fundamentals.
- I see sizable upside ahead as the company executes on monetization initiatives.
Pinterest (PINS) has been a surprisingly resilient stock in the social media sector. While PINS faces similar relevance risk as struggling peer Snapchat (SNAP), it also is generating positive cash flow similar to top peer Meta Platforms (META). PINS maintains a net cash balance sheet and management appears to be focused on improving both monetization and margins. PINS stock has seen some relative strength as of late due to an analyst report citing increased engagement on the platform. PINS stock remains a buy, but investors should temper their expectations as this is no longer a high-revenue-growth story (though growth may pick up over coming quarters).
PINS Stock Price
Like many tech stocks, PINS has given up its pandemic gains and trades at pre-pandemic levels. The stock has recovered substantially all of its losses following its latest earnings report.
I last covered PINS in April, where I rated the stock a buy on account of the focus on margin expansion. That thesis remains in place though I am growing more muted on future revenue growth expectations.
PINS Stock Key Metrics
In its most recent quarter, PINS delivered 5% revenue growth as a slowdown in its core U.S. & Canada market offset strong growth in Rest of World.
As someone who does not use the app personally, I was surprised to see PINS sustain solid growth in monthly active users ('MAUs') even as the pandemic appears to be in the rear-view mirror. It is important to note that PINS has seen stable MAUs in its core US & Canada market.
PINS saw average revenue per user ('ARPU') decline, but that was just due to the mathematical reality as the company saw faster growth from Rest of World users. There appears to still be a long growth runway for ARPU - for reference, ARPU at Meta Platforms stood at $9.62 globally in its latest quarter.
PINS saw adjusted EBITDA decline meaningfully as the company continues to work through over-hiring amidst the pandemic.
PINS ended the quarter with $2.7 billion of net cash and no debt, representing a fortress balance sheet. Looking ahead, management has guided for similar muted revenue growth in the next quarter. That might not seem so exciting - and it isn't - but this is no longer strictly a revenue-growth story.
On the conference call , management highlighted their multiyear strategic partnership with Amazon ( AMZN ) to show third-party ads on its platform. This step was quite logical as PINS has been seeking to increase the shoppability of its platform, and AMZN is arguably the best partner one could ask for in such an effort. Management noted that click-through rates and saves of Shoppable Pins grew by 35% YOY. Management reiterated expectations for margin expansion this year and noted that they had repurchased $100 million worth of stock under the share repurchase program.
Management has indicated that the company will have its first ever Investor Day in September, where they intend to outline their long-term strategy. I expect management to give explicit long-term revenue and margin targets at that meeting. While their growth rates may appear modest, management noted how they can eventually drive significant growth based on a compounding effect. User growth, engagement growth, and page optimization can eventually lead to attractive growth over time.
Subsequent to the quarter-end, there are signs of a robust showing heading into the next quarter. A recent note by Wells Fargo indicated an acceleration in engagement and hence impressions shown, likely due to 2022 now being an easy comparable. This may be signaling that the re-acceleration of growth that investors have been hoping for after the post-pandemic deceleration may finally be upon us, which comes with perfect timing as the AMZN partnership is expected to come online by the fourth quarter of this year. The strong recent momentum in the stock price may be met with strong momentum in the fundamentals.
Is PINS Stock A Buy, Sell, or Hold?
At recent prices, PINS was trading at a premium to SNAP and surprisingly not far from META on a price to sales basis.
PINS looks reasonably valued on the basis of earnings, but again trades curiously at a premium to META.
If it isn't clear, despite my bullishness for PINS, I have greater optimism for META stock. Even without multiple expansion, I can see PINS delivering solid returns from here based on margin expansion and increased adoption of shoppable pins. If revenue growth can accelerate as expected, then multiples may follow as well. The stock might not look obviously cheap, but this may be one of those cases where the estimates are too pessimistic.
What are the key risks? It is possible that PINS is unable to deliver as much operating leverage as expected. There is a clear mismatch between consensus estimates for revenue and earnings growth, with operating leverage being the clear proposed explanation. It is possible for example that PINS will have to cede gross margin to fully monetize their shoppable pins - I would not be surprised if AMZN receives a large cut of their third party advertising agreement. But perhaps the greatest risk of all is that of relevance. It is not entirely clear to me that PINS is a necessary social media app in today's landscape - I expect META to eventually make its Instagram fully shoppable as well. I have never been one to embrace the full value of the PINS platform, and while that is not necessarily a reason to avoid the stock, it certainly doesn't lend confidence in buying it. One can make a strong argument that META is clearly the better buy here, as it possesses both a stronger profitability profile as well as a stronger social media platform with a stock that trades at more compelling valuations. Yet in judging PINS itself, the stock simply looks too cheap when factoring in the long term benefit that operating leverage can have on the bottom line. The stock continues to look highly buyable given that management seems focused on driving larger margins over time. I rate PINS a buy though emphasize my heavy preference for the stock of META.
For further details see:
Pinterest: Increased Engagement Ahead Of Amazon Partnership - Reiterate Buy Rating