2024-01-11 09:46:33 ET
Summary
- Pinterest's recent share price uptick indicates growing investor interest, yet it remains below pandemic highs.
- Trading at 40x EBITDA, the stock presents a mixed investment picture, acknowledging both optimism and imperfections.
- The collaboration with Amazon Ads showcases positive strides, but challenges in sustaining user engagement need to gain more traction.
Investment Thesis
Pinterest (PINS) hasn't seen its share price go far in the past couple of years; even as its share price has started to uptick of late, it's still far from its pandemic highs.
Given the recent uptick in its share price, I'm inclined to believe that at long last investors have started to become interested in this stock that I've been recommending for a while.
The stock is priced at 40x EBITDA. Even though I remain bullish on the stock, I'm also able to remark that this investment is not blemish-free. Also, what's particularly bullish about Pinterest is that it has no debt on its balance sheet and more than $2 billion of cash and equivalents.
Consequently, given that the business is already highly profitable, together with its rock-solid balance sheet, I wouldn't be surprised to see some meaningful M&A taking place in the next twelve months.
Rapid Recap
Back in October, in a bullish analysis, I said,
Looking forward, I don't believe we'll revise that sub-$30 entry point much longer.
[...] its robust cash position and sustained focus on driving user satisfaction signal a promising trajectory ahead. Considering its current valuation of around 27x next year's EBITDA, which aligns with the company's solid balance sheet, I see the potential for Pinterest to deliver further positive returns to investors from this price point as it continues to capitalize on its strengths and navigate the evolving digital advertising landscape.
In fact, I want to revert to this time last year. I've been unrelentingly bullish on this stock for a while. Since last year, this is the performance on my recommendation.
Author's work on PINS
Has this been an easy recommendation to make? No. But was it the right call to make? It was. So, let's get into why I'm bullish on Pinterest.
Pinterest's Near-Term Prospects
In the past few months, the advertising landscape has started to change slightly. Yes, Pinterest has been a winner, as we've already discussed, but others have participated too, such as Snap (SNAP) and AppLovin (APP).
Hence, I contend that brands are more discerning with here they spend on advertising. More specifically, I argue that Pinterest is well placed to benefit from an increase in pricing power from increased relevancy of its ads with 3P partners, such as Amazon Ads (AMZN).
Pinterest is reaping significant benefits from its strategic partnership with Amazon. The collaboration has notably contributed to the platform's growth, marked by a substantial increase in ad relevance.
Pinterest emphasizes that more than half of Pinterest's users are actively engaged in shopping, creating a commercial mindset where relevant ads seamlessly integrate with the user experience. With the incorporation of third-party partnerships, particularly with Amazon, Pinterest has witnessed a remarkable improvement in ad relevance, showcasing a 50% increase in search relevance and an impressive 100% boost in related items.
This substantial progress not only enhances the user experience but also positions Pinterest as a more attractive advertising platform. Pinterest envisions a multiyear trajectory of sustained growth in ad load, driven by advancements in the platform and the integration of relevant demands. The positive reception of the Amazon partnership, characterized by increased engagement metrics and user satisfaction, underscores Pinterest's successful navigation of the evolving digital advertising landscape.
Given this background, let's discuss Pinterest's financials.
2024 Has Many Moving Parts
PINS revenue growth rates
Can Pinterest be counted on to accelerate its growth back to mid-10s%? That's the ultimate question that we need to get comfortable with. While I believe the answer is yes, given what we've already discussed, there's more to this too.
Namely, let's keep in mind that H1 2024 is up against very easy comparables. This means that unless something goes dramatically wrong, a strong H1 2024 is practically in the bag.
But can Pinterest sustain mid-10s% beyond H1 2024? Well, that's where the plot thickens.
SA Premium
The analyst community seems content that this will be the case. And given everything we've discussed already, I believe that's a likely outcome indeed.
That being said, while Pinterest has experienced significant successes, there are challenges that it must navigate. One notable challenge is the ongoing need to sustain and build upon its user engagement and monetization strategies. Pinterest has the makings of a successful turnaround story, but the market will require hard numbers in its financials to back up this point of view.
As the platform expands its focus on visual search, discovery, and shopping experiences, it faces the task of consistently delivering content that resonates with users across various verticals and having to tie this up with commerce opportunities too.
Additionally, with the continuous evolution of digital advertising and the impending shift to a cookie-less future, Pinterest must stay ahead in terms of privacy-safe measurement tools and relevancy in ad delivery.
Moreover, as the platform opens up to third-party partnerships, it needs to ensure seamless integrations and maintain high ad relevance. Simply put, Pinterest can't let itself be at the mercy of having to rely on Amazon for its growth prospects. Amazon isn't a charity and is perfectly capable of partnering with other advertising engines too, as well as being a highly proficient advertiser itself.
As a reference point, Amazon made $12 billion from advertising in Q3, this compares with Pinterest's approximate $1 billion projected for Q4 2023. In other words, Pinterest has to strike a balance between several different confluences, from user experience, ad monetization, as well as partnering up with other e-commerce players.
With this in mind, let's turn to discuss Pinterest's valuation.
PINS Stock Valuation -- 40x EBITDA
Pinterest isn't trading as cheap as it was when I previously recommended this stock to readers.
As I look ahead to 2024, I estimate that Pinterest will see around $640 million of EBITDA. For this figure, I estimate, Pinterest's progress on its EBITDA margins sustains at approximately 20% for 2024.
PINS presentation
This would leave Pinterest priced at 40x this year's EBITDA. Is that warranted? For this premium to be justified, Pinterest needs to reaccelerate its growth with its advertising business while showing that its e-commerce opportunities can gain significant traction. And preferably, with more commerce partners than just Amazon Ads.
The Bottom Line
Given the recent upturn in Pinterest's share price, my optimism persists, yet the investment is not without its complexities. The stock, currently trading at 40x EBITDA, reflects the market's recognition of Pinterest's potential, albeit not without imperfections.
While I remain bullish, it's crucial to acknowledge the challenges ahead. Pinterest's robust financial standing, debt-free balance sheet, and substantial cash reserves, exceeding $2 billion, present a solid foundation. The prospect of meaningful M&A activities in the next twelve months adds another layer of intrigue.
The platform's profitability and strategic initiatives, especially the promising collaboration with Amazon Ads, suggest potential growth.
However, as Pinterest strives to balance user experience, ad monetization, and partnerships in an evolving digital landscape, investors paying the 40x EBITDA premium anticipate that the platform can gather momentum and sustain its growth trajectory.
For further details see:
Pinterest's Strategic Collaboration With Amazon Ads