2023-09-21 07:00:00 ET
Summary
- Pinterest's revenue growth prospects are good, considering the company's large TAM and its key operating metrics.
- The optimization of infrastructure spend and the growth in third-party revenue are the key drivers supporting an improvement in operating profitability for PINS.
- I revise my rating for PINS to a Buy, as the favorable read-throughs from its Investor Day presentation points to a positive financial outlook for the company.
Elevator Pitch
I rate Pinterest, Inc. ( PINS ) shares as a Buy. I previously assessed PINS' prospects in five years' time with my prior May 17, 2022 article .
In this latest update, I highlight the positive takeaways from Pinterest's recent Investor Day which prompted me to upgrade PINS from a Hold to a Buy. PINS' management commentary and metrics at its 2023 Investor Day point to expectations of meaningful top line expansion and operating margin improvement for the company in three to five years' time. Pinterest is deserving of a Buy rating, as its favorable financial outlook supports a re-rating of PINS' stock price and valuations.
PINS' Financial Goals
Earlier this week on Tuesday September 19, Pinterest hosted the company's 2023 Investor Day and outlined its intermediate term financial goals at this key event.
In specific terms, Pinterest has set a target of delivering a "mid-to-high teens" percentage revenue CAGR and a normalized EBITDA margin at the "low 30s" percentage (30%-34%) level for the next three to five years as indicated in its Investor Day presentation slides .
PINS' financial targets for the medium-term are pretty impressive.
The company saw its revenue expand by +8.7% in FY 2022, and the market consensus sees Pinterest's top line growing by +8.0% for the current fiscal year. A mid-to-high teens percent annualized revenue growth rate going forward will represent a significant top line acceleration for the coming years.
Separately, Pinterest had previously targeted an adjusted EBITDA margin of 25%-29% for the long run when the company's shares were listed in April 2019. Also, the company's trailing twelve months normalized EBITDA margin was approximately 14%. As such, it is encouraging that PINS is aiming for a relatively higher EBITDA margin of above 30% in the years ahead.
Top Line Growth For Pinterest
PINS stressed at the 2023 Investor Day this week that there are "certainly upside scenarios (for its 3-5 year top line CAGR) where we could grow even faster than high teens."
I am of the opinion that Pinterest is justified in being bullish about the company's revenue growth prospects.
In its 2023 Investor Day presentation, Pinterest revealed its estimate of the company's Total Addressable Market or TAM as around $550 billion based on digital advertising market forecasts sourced from eMarketer and Insider Intelligence . As a comparison, PINS' trailing twelve months' revenue was $2,872 million (source: S&P Capital IQ ). Given that Pinterest's current top line is a mere 0.5% of its top line, it is safe to assume that the company has a very long growth runway ahead.
At its Investor Day event on September 19, Pinterest highlighted that "the synergy between engagement and ad load, as well as lower funnel progress" are the major factors supporting the company's revenue growth acceleration in the next few years. PINS' most recent quarterly metrics as highlighted below suggest that the company is moving closer towards achieving its medium-term revenue expansion goals.
The company achieved an impressions growth of over 30% in Q2 2023, which it attributed to "engagement gains and dynamically flexing ad load" at its second quarter results call . In comparison, the YoY increase for Pinterest's MAUs (Monthly Active Users) growth for Q2 was +8%. The relatively stronger expansion in impressions as compared to MAUs is an indicator of excellent user engagement for PINS.
On the other hand, PINS noted at its 2023 Investor Day that "the strength of our new lower funnel offerings" had contributed to a +50% YoY growth in "click-throughs and saves of buyable items" in the second quarter of this year.
The key metrics presented above imply that Pinterest is in a good position to meet its top line expansion goal for the mid term.
PINS' Operating Profitability
My view is that Pinterest has made the right moves to improve the company's EBITDA margin.
Firstly, PINS disclosed at its Q2 2023 results briefing that the company has executed on several "efficiency projects across storage and compute infrastructure" in recent times, which have translated into lower spending on cloud infrastructure. It is noteworthy that Pinterest's cost of revenue growth on a YoY basis moderated from +43% in Q3 2022 to +27% in Q4 2022, before slowing further to +16% for Q1 2023. In the most recent quarter or Q2 2023, PINS' cost of revenue increased by just +1% YoY as indicated in the company's Investor Day slides.
Secondly, Pinterest seems to hit a sweet spot when it comes to investments associated with AI. On one hand, PINS isn't investing heavily in AI to the extent that the company's profit margins are negatively impacted. On the other hand, it is making use of AI to enhance its user engagement. At its Investor Day this week, Pinterest mentioned that it is specifically "leveraging AI for high intent use cases."
Thirdly, the future growth in PINS' high-margin third-party revenue is expected to be a key driver of operating margin expansion for the company. In April this year, Pinterest revealed that it is "opening up third-party ad demand" with "Amazon ( AMZN ) as our first partner." Pinterest specifically highlighted at its 2023 Investor Day that the company's third-party revenue "carries very little incremental sales and marketing costs." As such, it is reasonable to assume that Pinterest's operating margins will improve over time as its number of third-party partners and third-party revenue grow in the future.
In a nutshell, I think that Pinterest's goal of expanding its EBITDA margin to 30% and higher in three to five years' time is realistic.
Concluding Thoughts
I raise my rating for Pinterest to a Buy, as there is a misalignment between the stock's valuations and the company's growth outlook. As per S&P Capital IQ data, the market values PINS at 18.4 times consensus forward FY 2024 EV/EBITDA, while Pinterest's consensus FY 2024-2027 EBITDA CAGR forecast is as high as +31.7%. As detailed above, Pinterest is well-positioned to achieve reasonably strong revenue growth and EBITDA margin expansion, but this isn't fully reflected in PINS' current valuations.
For further details see:
Pinterest: Positive Takeaways From Investor Day (Rating Upgrade)