It was going so well there for a while. Until late October, it appeared that Pinterest (NYSE:PINS) would be one of the few hot 2019 initial public offerings to post gains for the year. But following a soft earnings report, PINS stock tanked and it joined the struggling unicorns club. Now, Pinterest is ending the year on a sour note as the PINS stock price is just a buck above its all-time low.
Should investors give up all hope for Pinterest stock in 2020, though? No. In fact, the last earnings report from Pinterest actually had a lot to like. Pinterest may need a few quarters to turn sentiment around, but at the core, there’s still a solid bull case here. And the stock price is certainly more attractive for buyers down here under $20 per share.
An Underappreciated Platform
I suspect that a lot of investors are sleeping on PINS stock because it’s not a particularly popular social media website among investors. Something like Twitter (NYSE:TWTR) tends to attract more finance types. Even if it doesn’t get much hype in the investing community, however, Pinterest has built a rather impressive environment.
As of the latest quarter, monthly active users grew to 322 million, up an impressive 28% year-over-year. That’s nearly equivalent to Twitter’s user base, and is slightly ahead of Snap (NYSE:SNAP). Yet both Snap and Twitter have twice the market capitalization of Pinterest.
And arguably, Pinterest has a more monetizable user base than those rival social networks. Pinterest has a ton of people interested in verticals like cooking, gardening, arts and crafts, and home decorating where fans tend to buy high-dollar items and are already accustomed to purchasing things online. There’s a much clearer road map to large profit margins at Pinterest than you have trying to build advertising businesses at Twitter or Snap.
Cracking the Profit Code
For years, the knock on Pinterest has been that they built a good platform but they didn’t figure out monetization. However, the company is now building out free classes to help small businesses advertise on Pinterest, among other clever user engagement features. It’s paying off. On a quarter-over-quarter basis, the number of merchants uploading their catalogs to Pinterest soared 75%, for example.
Look at Shopify’s (NYSE:SHOP) success. As Amazon (NASDAQ:AMZN) has lost momentum and been overrun with lower-quality merchandise, drop-shippers, and other such maladies, it has opened up the playing field to the next generation of more personalized e-commerce. Pinterest hasn’t proven they can succeed yet, but there’s clearly a large opportunity for something like it to succeed. And the company appears to be drawing a critical mass of users and merchants already.
A Differentiated Advertising Platform
On the latest conference call, Pinterest’s CEO Benjamin Silbermann made a key point. He said that advertisers are increasingly seeking out platforms with positive messages and a friendly environment. Given the increasingly toxic environment on much of social media – something likely to only grow worse as the 2020 presidential election nears – Pinterest could be the biggest winner.
It’s a cheery upbeat platform where users won’t be overrun with political fighting, trolling, flame wars, and the like.
Another big benefit for Pinterest is that ads are less of a burden than on other platforms. If you’re scrolling through a Facebook (NASDAQ:FB) timeline, for example, it’s often easy to tell when your personalized content is interrupted by some generic ad.
But with Pinterest, the whole platform is so visual. People are going there to be inspired with image-driven ideas about their hobbies or interests. The difference between an organic photo and an advertiser-supplied photo on the same topic is rather small and may not even be noticeable much of the time. At least with the high-quality ads, they’re a type of additional content in their own right.
So Why Isn’t the Stock Performing?
Pinterest stock is near its all-time lows despite the compelling long-term opportunity and strong user growth numbers. Why’s that? Like many of the recent batch of unicorn IPOs, PINS stock came out at a frothy valuation. This made it vulnerable to any sort of decline in both performance and sentiment.
The company still trades at a valuation of $11 billion and is running negative cash flow. That’s not real healthy for a company that is already this mature and has hundreds of millions of users. You have to assume a fair bit of growth, both in the top line and in profitability, for Pinterest to justify its valuation.
There’s a more specific problem as well. The company’s North American growth decelerated dramatically. Pinterest is piling up tons of users internationally. This has kept user growth rates high but hasn’t translated into the sort of revenue growth you’d get from additional American users. Pinterest is taking steps to raise international monetization, but the market is clearly skeptical about whether it will play out.
PINS Stock Takeaway
Arguably, Pinterest is still in the early stages of monetization. Look at video ads for example. The company tripled video advertising revenues year-over-year. On the one hand, that’s a thrilling number. It also shows just how small a base Pinterest is starting off of in some of its growth markets.
Facebook didn’t solve mobile monetization until after it was public, leading to huge shareholder returns for anyone that bought before the inflection point became obvious. PINS stock could follow that example.
That said, there are no guarantees. Twitter, for example, has been publicly traded many years now, and it’s never fully worked out the monetization code. With Pinterest shares already pummeled, though, you have to like the potential for a big rally in 2020.
At the time of this writing, Ian Bezek owned FB stock. You can reach him on Twitter at @irbezek.
