2023-12-05 18:04:04 ET
Summary
- Pinterest is the only social media platform that can monetize its users for almost forever.
- The company is making solid progress in its partnership with Amazon advertisements.
- Management is guiding for greater than 15% annual revenue growth and 30% EBITDA margins over the next 3-5 years.
- Despite the fundamental momentum, I am downgrading the stock.
The Pinterest ( PINS ) ride is over, for me at least. The company has delivered on accelerated top-line growth amidst a tough macro environment and management has guided for further acceleration to persist over the next five years. The company has made substantial progress on margin expansion and management has also guided for further expansion moving forward. Yet why am I now moving to the sidelines? Despite the solid fundamentals of PINS, I no longer find the valuation appealing especially relative to peers. The stock might still deliver solid returns if tech overall can garner an even more premium valuation, but I am hesitant to base any investment thesis on such a fragile assumption. I am downgrading PINS stock from “buy” to “hold.”
PINS Stock Price
With growth almost nearly evaporating following the pandemic, PINS has struggled to see the same rebound as other beaten-down tech peers. I’m not waiting for more: the growth thesis has deteriorated since my initial report , so much so that the valuation does not look compelling even as the stock still trades at a fraction of all time highs.
I last covered PINS in September where I rated the stock a buy due to the strong balance sheet and improving profitability. The stock has jumped 22% since then, but I can not take so much credit given that recent trading sessions appear to reflect a frenzied tech melt-up. Take this opportunity to get out.
PINS Stock Key Metrics
In its most recent quarter, PINS generated 11% YoY revenue growth, coming in ahead of guidance for “high single digits” growth. This was the company’s third consecutive quarter of accelerating growth.
PINS also saw a solid showing on the monthly active users (‘MAUs’) front, with MAUs growing 8% YoY. As someone who does not use PINS myself, I find such a result to be quite strong given the crowded playing field.
PINS delivered 3% YoY growth in average revenue per user (‘ARPU’). The 5% growth in US & Canada was solid especially when compared to the results seen at Snapchat ( SNAP ), but the company saw its strongest results from Europe in which ARPU grew 26% YoY.
PINS delivered cost discipline alongside that revenue upside, with the most noticeable improvement seen in R&D, which declined meaningfully on a YoY basis. Prior to the 2022 tech crash, R&D was a line item which seemed to climb year after year without limit - those times are long gone.
PINS saw its adjusted EBITDA grow 139% YoY and even generated $6.7 million in GAAP net income.
PINS ended the quarter with $2.3 billion of cash versus no debt, representing a bulletproof balance sheet. Looking forward, management has guided for 11% to 13% revenue growth and for non-GAAP operating expenses to decline by up to 13% YoY.
On the conference call , management highlighted the uniqueness of their business model, in which “ads, when relevant, are additive to the user experience.” Management noted that artificial intelligence has helped improve the relevance of their content and drive increasing user engagement. At the 2023 Investor Day, management highlighted that engagement was growing faster than users.
Unlike other social media platforms in which advertisements might detract from the content, PINS is widely viewed to be one of the only platforms where the opposite is true. PINS has capitalized on that distinction by partnering with Amazon ( AMZN ) to show Amazon Ads in the feed. Management noted that they are seeing rapid improvement in ad placement - and that Amazon Ads will be the “first of many 3P partners.”
It is possible that Wall Street is pricing in the possibility that AMZN decides to acquire PINS outright, but I find such a possibility to be unlikely and the announcement of another 3P advertising partner would undoubtedly crush such hopes.
Is PINS Stock A Buy, Sell, or Hold?
PINS is a unique social media platform in that its users are often seen to be using the platform to complete projects. While PINS users might not use the product as much as competing platforms like Meta Platforms ( META ), they might be more inclined to make purchases, making PINS an ideal platform for placing advertisements.
With META or Youtube ( GOOGL ), there might be the question about the potential ceiling on advertisements, but with PINS, everything can be an advertisement.
At their 2023 Investor Day, management outlined expectations to grow revenue at a “mid to high-teens compounded annual growth rate” and expand adjusted eBITDA margins to the “low 30% range” in the next 3-5 years. Management expects to drive these improvements the old fashioned way: clear-cut execution.
PINS stock recently changed hands at around 33x earnings - a very “healthy” multiple especially considering that META is trading at around 22x earnings.
Consensus estimates call for PINS to achieve the top-line growth rate projected by management, marking solid acceleration from 2023 levels.
There’s a lot to like here, between the accelerating revenue growth, net cash balance sheet, and expanding profit margins. The company has even been repurchasing stock to at least offset dilution. But the main issue at this point is now that of valuation. Let’s say that by 2029, PINS has hit consensus estimates and the stock trades at 20x earnings. That would place the stock at around a 2x price to earnings growth ratio (‘PEG ratio’), arguably rich even for tech stocks. The stock would be trading at around $58.40 per share, representing 9.3% compounded annual return upside, or around 12% inclusive of the earnings yield. That return would likely be enough to beat the broader market by some margin, but it is arguably a modest potential return given that it is essentially assuming that everything goes according to plan. Given that there is “relevance risk” with PINS, especially when compared to the dominant Instagram platform from META, I would be more comfortable with around 15% potential annual returns, and the 20x earnings multiple assumed above seems too aggressive. In contrast, I note that the more dominant META is already trading at just 22x earnings and might deliver growth rates highly comparable with PINS.
Unless there is clear evidence that PINS is becoming a more relevant social media platform, I do not see reason to believe that consensus estimates are conservative. They appear to already be pricing in an expanding partnership with Amazon and based on my assumptions above, tech stocks need to sustain premium valuations in order for PINS to generate acceptable returns. I am downgrading PINS to “hold” given the less than attractive valuation.
For further details see:
Pinterest Is Soaring, But It's Time To Downgrade