Coming into the year, I called Pinterest (NYSE:PINS) stock one of my top picks for 2020. Not once. Not twice. Instead, I said over and over and over again that Pinterest stock was due for significant out-performance in 2020.
Fast forward two months. Year-to-date, Pinterest stock is already up more than 25%, thanks in large part to a strong fourth quarter earnings report which eased slowing growth concerns. By comparison, the S&P 500 is up just 4% in 2020.
Time to take profits?
I don’t think so. Instead, even at these elevated levels, I continue to view Pinterest stock as a top pick for 2020, with another 20%-plus upside potential into the end of the year.
Big Growth is Here to Stay
Pinterest is doing something very important: simultaneously improving the user experience while expanding advertising and e-commerce capabilities. Doing so at the same time lays the foundation for big sustained revenue growth.
At the end of the day, what Pinterest needs to do is grow the number of users on its platforms and increasingly monetize those users. As Jack Choros, CMO of Sophisticated Investor, told InvestorPlace in an email, the key to doing this is integrating advertising and e-commerce opportunities into the community fabric of the platform, so that such opportunities build on, rather than detracting from, the user experience.
“The platform must emulate Instagram and not go the way of Twitter (NYSE:TWTR). That is to say, it must focus on building a sense of community,” says Choros. “Instagram makes it incredibly easy to follow friends and have them follow you back. It provides a variety of mediums for advertising products and services, whether it’s with a link in the bio, a video or photo shout out, live Instagram streams or IGTV. The problem with Twitter is that people only know it as a sounding board or a source for news, there are limited ways to engage with communities when you can only speak in 280 characters or less.”
At the current moment, Pinterest is shaping up a lot more like Instagram than Twitter.
For example, consider Pinterest’s Verified Merchant Program . On the user side, this program enables consumers to more easily turn inspiration into action by buying from a trusted seller. On the revenue side, it enables merchants to more seamlessly sell product to consumers. It’s a win-win.
That’s just one of many examples of Pinterest rolling out experience-additive selling opportunities. All of these positive changes are what is fueling the big growth throughout the platform. Last quarter, Pinterest’s average revenue per user rose by 15%, while total users rose 26%.
In other words, both users and unit revenues are moving higher. So long as Pinterest keeps implementing experience-additive selling opportunities, both of these metrics will keep moving higher. And, so long as that remains true, Pinterest will sustain big growth.
Pinterest Stock Is Still Cheap
Considering that management is taking all the right steps to ensure big growth sticks around for a lot longer, Pinterest stock remains incredibly cheap.
Over the next few years, the user base will keep growing at a steady 5%-plus pace, thanks to Pinterest expanding the value props of and improving the user experience on its platform. At the same time, average revenue per user rates will grow at a 10%-plus pace, supported by expanding ad real estate, improving measurement capabilities, and increasing e-commerce opportunities. That combination should drive steady 15%-plus revenue growth over the next several years.
Concurrently, gross margins will expand towards the digital ad industry-average 80% rate with scale. Expense growth will moderate as huge initial investments in creating a solid ad product foundation, phase out. Positive operating leverage will kick in, and the expense rate will drop significantly.
Net net, by 2025, Pinterest will likely be a $4 billion revenue company with 20%-plus operating margins (which, for the record, is still very small for a digital ad platform with hundreds of millions of users).
Assuming so, my modeling pegs the company’s 2025 earnings at somewhere around $1.65 per share. Further assuming the stock fetches a 25-times forward earnings multiple — which is historically the average multiple for digital ad giants like Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — then that implies a 2024 price target for Pinterest stock of over $40.
Discounted back by 10% per year, that equates to a 2020 price target of over $28.
Bottom Line
Up 25% year-to-date, Pinterest stock may ostensibly look maxed out here.
It’s not. The company will sustain big growth over the next few quarters, and the stock remains remarkably cheap. That combination ultimately implies that shares still have big upside potential, even from today’s elevated levels.
As of this writing, Luke Lango was long PINS and FB.
