The wild roller coaster ride in shares of freshly pubic search platform Pinterest (NYSE:PINS) continued in early November, when PINS stock plunged more than 20% after the company reported sluggish third-quarter numbers that sparked concerns about a growth slowdown materializing before expected.
Specifically, Pinterest’s profit and user numbers topped expectations in the quarter. But, revenue growth decelerated meaningfully amid weakening ad demand trends, causing Pinterest to miss top-line estimates. At the same time, Pinterest narrowly hiked its full-year revenue guide — but the midpoint of the raised guide still fell below consensus expectations.
The ostensible implication? The Pinterest growth narrative is materially slowing well before it’s supposed to, and PINS stock may not deserve its premium valuation. As a result, shares dropped more than 20%.
But this drop looks more like a buying opportunity than anything else. In the big picture, the revenue fundamentals here remain favorable, and near-term ad demand weakness is just noise related to new ad product launches. Meanwhile, margins continue to improve with great pace. The company still has a realistic opportunity to produce sizable profits one day.
PINS stock still looks like a long-term winner. As such, this post-earnings plunge in Pinterest stock is a buying opportunity, and nothing more.
Pinterest Earnings Weren’t Bad
Despite the 20% post-earnings plunge in Pinterest stock, the company’s third quarter earnings report wasn’t all that bad.
On the negative side, revenues missed expectations amid deteriorating ad demand trends, which caused average revenue per user (ARPU) and revenue growth rates to decelerate meaningfully from the second quarter.
But on the positive side, user growth remained robust, with the monthly active user base rising 28% year-over-year. That’s roughly equivalent with the user growth rates Pinterest reported last quarter, and has reported since 2017.
Revenues still rose an impressive 47% year-over-year, one of the best marks across the entire digital ad landscape today. Gross margins improved by 400 basis points year-over-year, on-trend with the expansion the company has been reporting. The opex rate fell about 500 basis points year-over-year, also on-trend with previous quarters’ numbers.
Big picture: while revenue growth is slowing, everything else at Pinterest is firing on all cylinders, including the user growth and margin expansion narratives.
Things Will Get Better for Pinterest Stock
On the revenue front, things will get better for Pinterest and PINS stock. It pays to remember that Pinterest is in the early stages of developing and rolling out its ad business. Because of this, Pinterest’s ad business today projects to go through a lot of growing pains.
This quarter was one of those growing pains. Thanks to multiple new product launches and geographic expansions, Pinterest’s digital ad business probably offered more confusion than results for advertisers this quarter. That’s why ad demand growth slowed.
This won’t last forever. Instead, near-term confusion will turn into long-term conviction, mostly because Pinterest makes a great place for ads. Many consumers go to the platform searching for new recipes or browsing new clothing styles. Ads from a bakery or an apparel retailer fit seamlessly into that feed. They also will likely have higher engagement rates, because the consumer is viewing that feed with an intent to act.
Further, Pinterest is making all the right moves on the ad front. They are rapidly expanding their ad business to be global and match its increasingly international-heavy user base. They are also making things more “shoppable” on Pinterest, doubling down on bringing in merchant products and ad dollars into the platform. There’s a Shopify (NYSE:SHOP) partnership here, too, and a big push on the small business advertising front.
In other words, while Pinterest’s ad business slowed this quarter, the long-term revenue fundamentals remain solid, and there are enough drivers here in shopping and small business ads to reinvigorate the revenue growth trajectory soon.
PINS Stock Is Worth More Than $20
All things considered, Pinterest stock is worth way more than $20 today.
The numbers are easy. Pinterest has been adding users at a consistent cadence of roughly 70 million new users over the past 12 months. This growth will slow, because the platform is more deeply penetrating its addressable market, and there’s simply less room for growth. Still, Pinterest should be able to grow its user base at a cadence of roughly 20 to 40 million new users per year over the next few years. That puts 2025 users around 500 million.
ARPU rates will keep moving higher, driven by favorable fundamentals and healthy drivers in the shopping and small business arenas. Presently, they sit around $3.70, and are growing at a 15%-plus rate. Should it continue, 2025 ARPU rates may look something like $8 to $10. That’s where the ARPU rates over at Twitter (NYSE:TWTR) stand today.
At the same time, gross margins will continue to scale towards 80%, which is about average for mature digital ad giants. The opex rate should continue to fall with improved scale, especially if revenue growth rates remain north of 20% (as they should). My best guess is that the opex rate falls towards 50% by 2025, from about 70% last quarter.
Putting all that together, I think that PINS can easily do about $2.25 in earnings per share by 2025, if not more. Based on a growth-stock average 20-times forward earnings multiple, that equates to a 2024 price target for PINS stock of $45. Discounted back by 10% per year, that implies a 2019 price target of about $28, sharply above today’s price tag.
Bottom Line on PINS Stock
Wall Street didn’t like Pinterest’s third quarter earnings report. But the numbers weren’t that bad, and they will only get better because the secular trends here remain favorable. Meanwhile, the post-earnings plunge in PINS stock has dropped shares into significantly undervalued territory.
The implication? Buy the dip.
As of this writing, Luke Lango was long PINS and SHOP.
