Shares of visual search platform Pinterest (NYSE:PINS) popped on April 8, after management reported preliminary first-quarter numbers that came in ahead of consensus expectations. As of this writing, PINS stock is up 12% on the news.
Specifically, Pinterest reports that it expects record high engagement in the range of 365 million to 367 million monthly active users in the first quarter, better-than-expected revenues that were up more than 30% year-over-year and gave a solid update on the company’s cash situation and liquidity.
Management also pulled their full-year guide given uncertainties surrounding the novel coronavirus pandemic. That’s not good news but it’s entirely expected. As such, investors ignored the pulled guide, focused on the strong Q1 update, and pushed PINS stock higher.
Zooming out, the strong Q1 update paves a path for Pinterest stock to take back the $20 level. Here’s why:
- Strong revenue performance implies better-than-expected resilience for April and May. Pinterest’s revenues are holding up better than expected. If this continues in April and May, the company’s second quarter numbers may not be as disastrous as feared.
- Record high engagement today lays foundation for record high sales tomorrow. Because ad dollars follow engagement, Pinterest should be able to turn what is record high engagement today, into record high ad sales once advertisers start spending again.
- Ample liquidity should significantly reduce insolvency concerns. With $1.7 billion in cash on the balance sheet, no debt, and a $500 million revolver, Pinterest has enough liquidity to ride out a bad second quarter.
- The valuation remains attractive. Long-term profit growth potential continues to imply that PINS stock is fairly valued north of $20.
Strong Revenue Performance
Pinterest reported that first-quarter revenues would come in around $270 million, up 33% year-over-year and ahead of consensus estimates for $268 million.
If you assume that Pinterest was growing revenues at its regular 40% pace for the first two and a half months of the quarter, then the implication is that revenue growth dropped to the low single digit range in the last two weeks of March. That’s not bad, all things considered, and it implies that second quarter numbers could be much better than feared.
The first two weeks of April will probably be just as bad as the last two weeks of March. The last two weeks of April could improve, a bit, as the pandemic starts to fade. Trends should rebound slightly in May, and then start to normalize in June. All together, then, Pinterest could easily do 10%-plus revenue growth, if not better, in Q2.
That’s much better than what some have been fearing… and points to the upcoming first quarter earnings report (in which we will get a read on April trends) as a potential upside catalyst.
Record High Engagement
Pinterest reported 366 million monthly active users in the first quarter, up an astounding 31 million users quarter-over-quarter (which is the biggest increase on record).
Presumably, this big uptick will continue in the second quarter, since consumers globally will still be cooped up for most of April and part of May. As such, Pinterest could report another record high user growth quarter in Q2.
That doesn’t mean much today. Advertisers aren’t spending. But, ad dollars follow engagement. So, when advertisers do start spending again in the back half of 2020, they will spend where the engagement is. Right now, a lot of that engagement is on Pinterest.
Net net, record high engagement on Pinterest today, should lead to record high ad sales in the back half of the year.
Pinterest reported that the company finished the first quarter with $1.7 billion in cash, no debt, and an undrawn $500 million revolving credit facility.
Broadly, that means the company has $2.2 billion in immediately available liquidity, with no debt obligations, and an expense base that in the fourth quarter of 2019, was under $450 million.
The math there isn’t hard. Pinterest has more than enough liquidity on hand to ride out a bad second quarter, and even a bad third and fourth quarter, before insolvency becomes a risk.
The Q1 update caused me to revise my fiscal 2020 estimates on Pinterest slightly higher to account for better-than-expected Q2 performance. However, my long-term estimates remain largely unchanged.
I still see Pinterest scaling towards $1.50 in earnings per share by 2025. Based on a 25-times exit multiple — which is average for digital advertising stocks — and a 10% annual discount rate, that implies a 2020 price target for PINS stock of over $20.
As such, the long-term profit growth potential at Pinterest continues to point to further upside in PINS stock.
Bottom Line on PINS Stock
Pinterest’s first quarter update showed that this company’s second quarter may not be as bad as feared, that engagement is ticking up at a record pace, and that there’s enough liquidity on-hand to ride out any and all near term pain.
In short, it was a very positive update. PINS stock is reasonably up big in response. This rally is far from over. Over the next 3 to 6 months, I see PINS stock continuing to head higher, on the back of better-than-expected second quarter numbers and improving growth trends in the back half of the year.
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.