In early February, Pinterest (NYSE:PINS) posted a surge in revenue, and its non-generally accepted accounting principles (GAAP) earnings beat consensus estimates. And while its losses shrunk considerably, the growing usage on the site is very encouraging. Users on the platform who actively seek out ads will encourage brands to promote their goods on Pinterest. This will only help Pinterest stock trend higher.
Even though PINS stock surged to over $27 following the earnings report only to pull back, the uptrend is holding. Pinterest stock bottomed at $18 at the start of 2020 and appears poised to reward its investors.
Strong Q4 Results
Pinterest posted fourth-quarter revenue growing 46% year-over-year (YOY) to $400 million. For 2019, revenue grew by 51% YOY to $1.1 billion. More importantly, global monthly active users (MAU) rose sharply by 26% to 335 million. The company managed to reduce its GAAP net loss to just $36 million. And finally, Pinterest expects full-year revenue to come in close to $1.5 billion, an its full-year adjusted EBITDA to stay flat with 2019.
Having listed publicly in April 2019, Pinterest continues to demonstrate a sustainable growth momentum. It owes its strength to its ability to attract creative and talented staff. By improving the end-user experience and that of advertisers, Pinterest will likely grow its monthly active user base in 2020.
Pinterest is also very inexpensive to run: The cost of revenue for the quarter was just $96.3 million. The bulk of its expenses was in research and development (at $165 million) and $127.5 million in sales and marketing. These are variable costs that the company may adjust lower as revenue growth accelerates organically.
Pinterest Has Four Priorities
Management highlighted four priorities that will drive the business forward. Last year, it focused on making the site accessible for its small advertisers. It built mobile tools and provided basic analytics and reporting. Scaling its ads business is its second priority. It will do so by pitching relevant ads that are also useful to the user. The company said that people saving their ads increased by threefold.
Helping Pinterest users get more value is its third priority. It will achieve this by helping people get inspired while on the site. The high engagement rate is linked to users having many interests, projects and hobbies. These users then create several boards to fulfill project tasks.
Making Pinterest easier for shopping is its fourth priority. The company said that “last year, we dramatically increased our inventory in stock products by making catalog upload or self-serve and by driving its adoption across our managed advertiser base.” So, by linking inspiring images to shopping services, Pinterest is well on the way to driving merchant sales, advertising revenue and higher user engagement.
Pinterest relies predominantly on the U.S. market for its revenue. Although international revenue almost doubled from last year, it only accounted for $50 million of the $400 million in total quarterly revenue. Revenue growth rates also slowed since peaking at a 62% growth rate in 2019’s second quarter. Still, the company’s growing size may slow total growth. And MAU growth in the double digits will lead to higher average revenue per user in 2020.
Valuation on Pinterest Stock
Analysts who rate Pinterest stock have an average price target of $29.89. Conversely, the stock ranks poorly against its peers. For example, investors would get more value buying Yelp (NYSE:YELP) instead.
The confident investor may bet that growing monthly user activity will drive quarterly profits higher later this year. As long as the overall market hols up, buying the dip here just may pay off.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, Chris did not hold a position in any of the aforementioned securities.