Shares of social media platform Pinterest (NYSE:PINS) have been volatile ever since the company went public back in April 2019. The IPO price of Pinterest stock was $19 per share. The opening price of PINS stock was $23.75. Ever since, PINS has soared as high as $37 and dropped as low as $24.
In other words, Pinterest stock has been both hot and cold over the past six to seven months. For an unprofitable company that launched its IPO less than a year ago, that’s par for the course. Any good news makes investors more confident that PINS can sustain its high revenue growth and eventually deliver huge profits. On the flip-side, any bad news makes more investors believe that the company’s revenue growth will flatten, and that it will never be profitable.
The bullish thesis on PINS looks much more compelling than the bearish outlook. The company’s fundamentals indicate that Pinterest will generate strong user and revenue growth over the next few years. That rapid growth, coupled with the company’s strong gross margins, appears poised to eventually produce high profits for PINS. Those huge profits will translate into a high price tag for PINS stock.
Consequently, investors should buy Pinterest stock when it’s down because PINS will perform well over the long-term.
Pinterest Stock Is Supported by Strong Fundamentals
Pinterest stock is supported by strong fundamentals, which leave PINS well-positioned to produce huge profits in the not-too-distant future.
At its core, Pinterest is a streamlined project and design inspiration app. It provides unique value to its users, and the website has enduring,growing appeal. Pinterest is where consumers go to find inspiration for a trip, a remodeling of their home, recipes, outfits, so on and so forth. No other website really directly competes with Pinterest.
Say you want to remodel your kitchen, and are looking for design ideas. You could use Google, but it’ll give you cluttered results. Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) won’t be much help. Instagram will offer you some kitchen photos, mixed in with a bunch of other unrelated photos.
Pinterest, though, will offer you a curated, digital showroom of ideas on how to remodel your kitchen. It also provides ideas on new clothing, vacations, recipes, etc. Pinterest is the best option for consumers to get visual inspirations for designs and projects.
At the same time, consumers are spending more time and money on experiences, i.e. going on more vacations, buying new clothes, and doing more remodeling. In this world, consumers will be on Pinterest more, seeking information on new experiences.
As a result, for the foreseeable future, PINS will continue to grow rapidly. Further, Pinterest will easily monetize its users with ads, since ads don’t really interrupt users’ experience. And PINS can easily and effectively show its users ads that will interest them. If someone is looking for clothing ideas on Pinterest, and a clothing retailer ad pops up, there’s a good chance that she’ll click on that ad.
All in all, Pinterest’s user and revenue growth should accelerate rapidly for a long time.
Pinterest Stock Is Worth More Than $30 Today
Given the favorable long-term growth fundamentals of PINS, Pinterest stock is worth more than $30 today.
Here are the numbers. PINS has about 300 million global monthly active users. That number has risen by 69 million over the past 12 months. Given the unique value that Pinterest provides, PINS is well-positioned to keep adding roughly 20 million to 50 million new users every year over the next five years. As a result, Pinterest is on track to have 500 million users by 2025.
PINS’ average revenue per user (ARPU) over the last 12 months currently stands at $3.40. That’s up almost 30% from a year earlier. Pinterest is still in the early stages of monetizing its platform. The ARPU of other established social media platforms is at least $10. Pinterest will get there soon. Assuming 15%-20% ARPU growth per year over the next several years, Pinterest’s ARPU should reach $10 by 2025.
Putting those two together, PINS’ revenue could reach $5 billion by 2025. Its gross margins should rise towards 80%, which is what most other established digital ad players are getting. As PINS grows, its operating spending rate could reasonably fall towards 50%, which many other established digital ad players have reached. Thus, PINS’ operating margins could reach 30% by 2025, potentially resulting in $1.5 billion in operating profits.
Assuming more shares of PINS stock are issued and an average tax rate, I think the company’s earnings per share will reach about $2.50 in 2025. Based on a forward price-earnings multiple of 20, which is average for growth stocks, my 2025 price target for Pinterest stock is $50. Using a 10% annual discount rate, that equates to a 2019 price target of over $30.
The Bottom Line on PINS Stock
Pinterest stock is a long-term winner that’s going through some growing pains. The investment implication, then, is simple: Buy PINS stock when it’s down.
Right now, Pinterest stock is down. That means it’s time to buy the shares.
As of this writing, Luke Lango was long PINS and FB.
