Visual media platform Pinterest (NYSE:PINS) hit the public markets with a splash in April 2019. PINS stock opened trading at $23.75, about 25% above its $19 IPO price. It rose all the way to $37 by August 2019 as investors expressed optimism about the company’s ability to monetize its already huge user base.
But Pinterest’s ad business hit a snag in the third quarter of 2019. Its revenue growth dropped sharply, falling below 50% for the first time ever. Investors freaked out. PINS stock dropped, and it fell for a long time afterward.
Over the past month, however, Pinterest stock has rallied 25%. Investors are starting to bet on the idea that the slowdown of its ad business in Q3 was an outlier. Bullish investors also think that the company’s growth will improve over the next few quarters.
They’re right. In 2020, Pinterest’s ad business will get back on track. Its revenue growth will accelerate as global digital ad spending rebounds and as Pinterest strategically positions itself to benefit tremendously from that favorable environment.
As all that happens, PINS stock will bounce back dramatically. My estimates indicate that Pinterest stock could rally another 40% in 2020. Here’s how that could happen.
Pinterest’s Ad Business Will Bounce Back
Pinterest’s ad business stumbled in Q3. That won’t happen again. Instead, over the next few quarters, Pinterest’s ad business will rebound tremendously.
There are three reasons for my thesis.
First, global digital ad spending trends will improve dramatically in 2020. That’s because ad spending is always closely linked to economic strength. When times are good, companies spend a great deal on advertising as consumers raise their expenditures. When times are bad, companies reduce their ad spending as consumers cut their expenditures.
The economy wasn’t that great in 2019, mostly because of uncertainties and pressures created by the U.S.-China trade war. That trade war has essentially been put on pause, so the economy should bounce back in 2020. As it does, companies will spend more on ads.
Second, Pinterest is well-positioned to expand its advertising market share. The Pinterest platform is a perfect place for ads. Pinterest is not a source of free entertainment like Facebook (NASDAQ:FB) or Snap (NYSE:SNAP). Consumers visit Pinterest because they are interested in discovering information or buying something. For example, the website provides information about clothing and furniture that can be purchased. As a result, Pinterest has a unique mission which should allow it to both deliver highly relevant ads and get higher conversion rates on those ads than its competitors.
Thus, as Pinterest’s ad platform gains traction in 2020, Pinterest’s ad revenue will surge.
Third, Pinterest is still growing at an impressive rate. According to eMarketer, the website now has more U.S. users than Snap. Moreover, Pinterest’s user base is very diverse, with a healthy percentage of all age demographics.
The sustained expansion of Pinterest’s highly diverse user base will attract marketers who want to advertise to older audiences (not just teens) through a social media channel with high engagement levels.
All in all, Pinterest’s ad business will have multiple positive catalysts in 2020. These catalysts should cause Pinterest’s growth to accelerate.
Pinterest Stock Could Soar 40%
Pinterest stock fell tremendously in 2019, reaching very depressed valuations. As a result, if its ad business does accelerate in 2020, its shares could rise by a jaw-dropping 75%.
Simply consider that Pinterest has more U.S. users than Snap and a far bigger international presence. Yet Pinterest’s market cap is only about half that of Snap. Thus, if Pinterest can show in 2020 that it can effectively monetize its bigger user base, PINS stock will be able to move much higher.
I estimate that Pinterest’s earnings per share can reach $2.25 by 2025. That estimate is based on four very realistic growth targets.
First, I’m assuming that Pinterest will hit 500 million users by 2025, up roughly 6%-7% per year from 2019’s expected total of 340 million. Secondly, I expect Pinterest to monetize its users at comparable rates to Snap and Twitter by 2025, likely enabling its average revenue per user to soar. Third, Pinterest’s revenues will rise by 25% per year through 2025. That would still only put Pinterest at a measly $4.2 billion of sales, or less than 1% of the global digital ad market. Finally, Pinterest’s margins will increase to the average level of the digital ad industry.
A forward earnings multiple of 21 (which is roughly the historical average for growth stocks) and estimated earnings per share of $2.25 in 2025 would result in a PINS stock price in 2024 of over $47. Discounted back by 10% per year, that equates to a 2020 price target of over $32.
That’s about 40% above where PINS stock is now. Thus, this huge rally of Pinterest is really just getting started.
The Bottom Line on PINS Stock
Pinterest dropped the ball in Q3. The market thought that this meant that the Pinterest growth narrative was coming to a screeching halt. It isn’t.
In 2020, Pinterest will deliver multiple blowout earnings reports that will affirm that its growth has more momentum than ever before. As this happens, PINS stock will continue to rally tremendously.
As of this writing, Luke Lango was long PINS, FB, and SNAP.