2023-09-10 08:30:00 ET
Summary
- Pinterest has the potential for substantial revenue growth and increased shareholder returns through ARPU expansion via shoppable ads.
- The company has returned to user growth with Covid volatility hiding ~15% annualized growth since 2018.
- The stock price is compelling at 5x '24 sales with multiple expansion potential.
Pinterest ( PINS ) is slowly delivering on the opportunity to turn the images platform into a social commerce experience. The stock market hasn't always been impressed by the reported metrics, but the social media company is back in growth mode. My investment thesis remains Bullish on the stock with the ability to greatly expand limited ARPU levels.
Source: Finviz
Shoppable Commerce Growth
Pinterest doesn't provide any detailed metrics on the shoppable revenues, but this part of the business is growing substantially from a small base. On the Q2'23 earnings call , CEO Bill Ready made this claim on growth:
We're now seeing strong growth and engagement with shopping related content on our core surfaces. And for the past four quarters, shopping ads revenue has grown multiples of our total revenue growth. I believe we are just scratching the surface when it comes to monetizing lower funnel behavior on Pinterest.
In total, revenues grew 6.4% to $708 million. Pinterest grew adjusted EBITDA to $107 million for 16% growth with the spending phase over and the company back growing profits.
One way to verify progress on making the platform more shoppable is via the ARPU metrics. The overall global metric dipped during the quarter by 1% to $1.53. This metric is convoluted with the faster growth in the Rest of World segment with the lowest ARPUs lowering the global ARPU.
The better focus is on the per region ARPUs where Europe grew 6% YoY to a still minimal $0.91 and Rest of World was up 20% to $0.12. Shareholders will definitely want to see the US & Canada region produce far higher ARPU growth above a 2% rate when Facebook ( META ) has a $53.53 rate in the key region.
Pinterest suggests the monetizable engagements measured by global ad impressions were up 30% in the quarter due to engagement gains and dynamically flexing ad load when a user expresses intent. The next step will be to monetize these engagements at a far higher rate to drive revenue growth considering Facebook produces a quarterly ARPU nearly 10x the rate of Pinterest.
When combining this ability to boost engagement with any user growth, Pinterest has meaningful upside potential. After a volatile period due to some Covid boosts back in 2020, the social imaging company is now showing decent MAU growth providing the extra kicker to revenue growth in the years ahead.
Pinterest only needs roughly 5% user growth over time to provide a major tailwind to revenues. Even just basic 5% ARPU growth leads to double-digit revenue growth and the new management team will have failed miserably to not have produced 5% ARPU growth with the shoppable ad concept and the recent addition of the Amazon ( AMZN ) Ads platform discussed in the previous research.
Back on the user numbers, Pinterest has grown MAUs at a roughly 15% annual clip since the start of 2018. The pull forward has hidden these gains making the platform appear maxed out when the issue was really more Covid distortions and growing pains.
Stock Upside
The big opportunity is for Pinterest to generate sales in excess of the targeted growth running from 10% to 16% over the next 4 years. The company only needs to produce more normalized user growth and limited ARPU expansion to reach a more consistent 15%+ growth rate.
The stock only trades slightly above 5x consensus sales targets of $3.5 billion for 2024. The multiple is pretty normal for a 10% growth rate, so investors can generate solid returns with Pinterest achieving simple growth rates in the 15% range.
The potential actually exists for substantial ARPU expansion due to the social commerce and shoppable features being implemented on the platform. A company that starts producing 20% growth would provide shareholders with at least 20% annual returns along with the potential for multiple expansion providing the holy grail for shareholders where the stock is rerated to a higher P/S multiple over a short period.
Takeaway
The key investor takeaway is that Pinterest stock is compelling down here at $27.55. The company has an Investor Day upcoming on September 19 and the company is likely to dive deeper into social commerce opportunities providing a catalyst for the stock in just over a week.
For further details see:
Pinterest: Unlocking Growth