2023-10-31 04:19:28 ET
Summary
- Pinterest delivers a positive earnings report, reaffirming its financial targets and showing strong growth potential.
- The company's near-term prospects focus on user engagement, expanding its role as an advertising platform, and leveraging AI capabilities.
- While there are challenges in the competitive landscape and macroeconomic uncertainties, Pinterest's focus on profitability and solid balance sheet position it for continued growth.
Investment Thesis
Pinterest ( PINS ) delivers its highly anticipated turnaround story. There are plenty of positive aspects for investors to latch onto. Although I am steadfastly bullish on the stock, I also recognize that it's not a blemish-free report.
Altogether, I estimate that Pinterest is priced at around 27x next year's EBITDA. The most pressing aspect of the Pinterest story is that its balance sheet is incredibly strong.
Pinterest reaffirms its financial targets, aiming for a mid to high-teens compound annual growth rate and reaching the low 30% range for adjusted EBITDA margins in the next three to five years. This earnings report is clearly a step in that direction, leading investors to posit that things could continue to improve from this point forward.
Rapid Recap,
In my previous analysis , I said,
[...] There's clearly tremendous user appeal for Pinterest's platform, even now. There's only a challenge in how to better monetize its users. Something that management is clearly busily working on. And if management were for any reason to ''forget'' of this pressing urgency to better monetize its users, I suspect activist shareholder Elliott Management, with its large stake in Pinterest, will be nearby to keep management focused on this north start.
Below you can see a chart that reflects my bullish stance for PINS in the past year.
Author's work on PINS
Looking forward, I don't believe we'll revise that sub-$30 entry point much longer.
Pinterest's Near-Term Prospects
Pinterest's near-term prospects are centered around its continued emphasis on user engagement and expanding its role as a full-funnel platform for advertisers. The company is poised to capitalize on the growing trend of visual search and discovery, leveraging its advanced AI capabilities to provide personalized and relevant content to its users. Pinterest's focus on product innovation, including enhancements to the shopping experience and the introduction of new ad formats, aims to drive higher user satisfaction and deeper engagement. Additionally, the expansion of its third-party partnerships, as evidenced by the successful integration of Amazon ads, signals a promising avenue for future growth. Pinterest's strategic positioning as a platform that seamlessly bridges inspiration and action positions it well for continued user base expansion and increased advertiser demand.
Revenue Growth Rates Were Expected to Pick Up, What's Next?
PINS revenue growth rates
In this section, I'll discuss some positive and negative considerations.
Q4 2023 was always expected to be strong. I had been mentioning this for months, with the low growth rates in Q4 of the prior year setting an extremely low hurdle.
Naturally, given Pinterest's newly found momentum, it looks very likely that at least into H2 2023, Pinterest will be delivering mid-10s% CAGR, which is undoubtedly positive and most welcome.
Moving on, while Pinterest has made notable progress in user engagement and monetization, the company faces certain challenges that could impact its future trajectory. One such challenge is the evolving competitive landscape, characterized by the intensifying rivalry among digital advertising platforms. Additionally, the ongoing macroeconomic uncertainties and fluctuations in the advertising industry pose potential risks to Pinterest's revenue growth and profitability.
Given this context, I'll next discuss its profitability.
Pinterest's Path to Profits
The company's future success will depend on its ability to navigate these challenges while maintaining its focus on driving user engagement and delivering value to its advertising partners. Achieving sustained margin expansion in the face of evolving market dynamics remains a critical area of focus for Pinterest as it seeks to solidify its position.
I recognize that media outlets are praising Pinterest's jump in users, but now consider this:
PINS Q2 2023
This was Pinterest's MAUs back in Q2 2023 (ending June 2023). We can see that the highly coveted US and Canada users increased by 3% y/y. And now check out Pinterest's Q3 2023 MAUs:
PINS Q3 2023
We can see that US and Canada users' growth rates are saturating.
So, yes. The stock is up and jumping premarket. And yes, I've been bullish on this stock and welcome the stock jumping strongly.
But there's nothing wrong with sprinkling some skepticism too. Perhaps, it's even healthy. Moving on, let's estimate what Pinterest's 2023 EBITDA is likely to end up as.
PINS Q3 2023
I believe it's reasonable to suspect that Q4, the advertising-heavy quarter should see around $250 million of EBITDA.
This would imply that 2023 would report $575 million.
Next, if we presume that Pinterest's newly found momentum translates into its bottom line improving by a further 10% in 2024, this would see its EBITDA reach approximately $640 million in 2024.
This would leave the stock priced at approximately 27x forward EBITDA. That's not cheap. But on the other hand, I've attempted to be extremely conservative with my bottom-line estimates.
After all Pinterest's adjusted EBITDA has just increased by 139% y/y. I believe that for it to continue growing by 10% in 2024 is an incredibly easy hurdle. In fact, this estimate is far below what management is aiming for. This means that perhaps the stock is priced closer to 20x EBITDA rather than 27x EBITDA.
The Bottom Line
In my analysis, I remain optimistic about Pinterest and its future prospects. With the company's recent turnaround efforts and strong emphasis on user engagement, coupled with its strategic initiatives in AI and third-party partnerships, Pinterest appears well-positioned for continued growth.
Furthermore, 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.
For further details see:
Pinterest's Turnaround Story: Path To Recovery, What To Know