In the wake of the novel coronavirus pandemic, shares of visual search platform Pinterest (NYSE:PINS) fell off a cliff. In a matter of weeks, Pinterest stock dropped from $25 to $10.
The selloff makes complete sense. The world has come to a screeching halt. Consumers aren’t going out and buying anything. If consumers aren’t going out and buying anything, then why would marketers advertise?
They aren’t. And they won’t for the foreseeable future. This significant ad spend slowdown will materially hurt Pinterest’s growth trajectory, especially since Pinterest is highly levered to discretionary spending and brand advertising.
From that lens, the huge selloff in Pinterest stock makes complete sense.
But, at $10, the stock is also a very attractive long-term investment. For four big reasons.
- The ad spending slowdown is temporary. Current modeling projects that the coronavirus pandemic will peak in April, and be largely contained by May/June. The economy will subsequently normalize. Consumer spending will pick back up. As will ad spending.
- Pinterest is increasingly establishing a unique value prop to advertisers. Through various innovations, Pinterest continues to dramatically improve its advertising platform, which presently appears to be one of the best ad platforms for consumer discretionary brands.
- Record high engagement today will fuel record high sales tomorrow. Pinterest has reported that its platform is seeing record high engagement during the quarantine. Because ad dollars follow engagement, once ad spending rebounds, record high engagement will turn into record high ad sales.
- Pinterest stock has huge long-term upside potential. Even after reducing my estimates on Pinterest to account for a dramatic ad spending slowdown at the hands of the coronavirus, I still see Pinterest stock rallying towards nearly $20 by the end of the year.
Temporary Ad Spending Slowdown
The coronavirus pandemic will not last forever. Current modeling, based on the progression of the virus in various regions, projects that the pandemic will peak in mid-April, before gradually fading and hitting near-zero transmission by May/June.
Thereafter, there is ample fiscal and monetary stimulus in the pipeline to turn what will be pent-up consumer demand into robust consumer discretionary spending on things like restaurants, clothes, cosmetics and more. As consumer discretionary spending picks back up, so will brand advertising.
Consequently, while ad spending trends will be severely depressed throughout most of the second quarter, they should rebound in the back-half of 2020.
Innovation Fuels Ad Platform Improvement
As a visual search platform that consumers use to discover inspiration for things to do, Pinterest is naturally levered to offer advertisers a unique and compelling value prop. That is, Pinterest’s users aren’t just on the platform aimlessly scrolling. They are on the platform with intent to do something, which should lead to higher consumer interest in ads and higher conversions.
But, Pinterest isn’t just resting on its laurels of having intent-driven users. Instead, management is continuously innovating to improve its ad platform for brands — even during the coronavirus.
Just last week, Pinterest announced its Verified Merchants Program, which will allow brands to do things like create a catalog of “shoppable” products on the app and use special re-targeting capabilities in their ads. Such ad platform improvements, on top of an ad platform that already offers a unique and compelling value prop, position Pinterest to gain share in the digital ad market for many years to come.
Record High Sales in 2H20
Pinterest recently announced that, as expected, its platform is seeing record high engagement during the quarantine.
Today, that record high engagement will help support sales stabilization. But, it won’t lead to a huge uptick in sales, because ad budgets are pressured and marketers aren’t advertising as much.
That won’t last forever. As stated earlier, ad spending trends will rebound in the second half of 2020.
When they do, because ad dollars always follow engagement, Pinterest will be able to turn second quarter record high engagement, into second half record high sales.
Huge Upside Potential
I’ve revised my 2020 estimates lower for Pinterest in light of coronavirus disruption to the digital ad market, with my 2025 profit per share estimate for this company coming down to $1.30 from $1.50.
Still, if Pinterest can earn $1.30 per share in 2025, PINS stock is woefully undervalued today.
Based on a 20-times exit multiple and a 10% annual discount rate, $1.30 in 2025 earnings per share implies a 2020 price target for PINS stock of $18 — about 80% above the stock’s 52 week low $10 price tag.
Bottom Line on Pinterest Stock
Pinterest is a long-term winner going through some near-term pains. These near-term pains will pass. Once they do, this stock will get back to winning, and in a big way from today’s depressed levels.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long PINS.
