Pinterest (NYSE:PINS) stock popped after the company reported surprisingly strong second quarter numbers that smashed expectations. These results were accompanied by an even stronger guide, which implies that Pinterest will emerge from the novel coronavirus pandemic stronger than ever before.

In the big picture, Pinterest’s strong earnings confirm that Pinterest is indeed in the first inning of a robust, multi-year growth narrative.

That robust, multi-year growth narrative will power huge gains in Pinterest’s revenues, profits and the price of PINS stock over the next 5 to 10 years.

But, Pinterest’s stock is fully valued above $30. So don’t chase the rally. Instead, wait for the hype to fade. Wait for the stock to cool off. Then buy on dips below $30.

Here’s a deeper look.

Strong Pinterest Earnings

Pinterest’s second-quarter earnings report was stellar.

Monthly active users (MAUs) rose 39% year-over-year, versus a trailing four quarter average MAU growth rate of 27%, as consumers globally flocked to Pinterest amid widespread stay-at-home orders. That 39% year-over-year growth equated to 49 million net new MAUs in the quarter, a record for Pinterest as a public company and miles head of the trailing four quarter average net add volume (less than 20 million).

User growth did moderate in July, as expected. But user and engagement growth trends have stabilized in July at levels well above where they were pre Covid-19. To that end, it appears the pandemic has created a lasting acceleration in Pinterest platform usage.

Perhaps more impressively, ad revenues at Pinterest are recovering in a big way. After falling steeply in March, ad revenue trends have rebounded consistently every month ever since. In July, ad revenues are trending up 50% year-over-year.

That’s a huge number. Much bigger than even the 46% revenue growth reported in the last quarter of 2019.

What caused the acceleration coming out of the pandemic

1. User growth acceleration has attracted more advertisers and ad dollars.
2. Platform improvements — such as the Today Tab and Shopping — have enabled consumers to more seamlessly and consistently interact with brands products and ads.
3. Ad platform improvements — such Shopping Ads, auto-bidding and dynamic targeting — have created a more robust Pinterest ad ecosystem with higher conversions.

All in all, then, Pinterest’s earnings confirm one very powerful truth: Pinterest will emerge from the pandemic a much stronger platform than it was coming into the pandemic.

Huge Growth Potential

The Pinterest growth narrative is compelling.

The story is pretty simple.

Pinterest is a platform consumers use with the intent to discover new products and services. It’s essentially an online catalog of experiences, brands, products and services — which gives it an entirely differentiated value prop from other social media platforms, the sum of which are used almost exclusively for entertainment and/or communication.

Because of this differentiated value prop, Pinterest is sticky. The user base won’t churn. Instead, the user base will only grow as product discovery and inspiration increasingly digitize.

Further, because this sticky user base is going to Pinterest with a discovery intent, ads on the Pinterest platform will be exceptionally effective, with high conversions and minimal disruption. After all, Pinterest is already a visual feed of people recommending products and services. A visual brand recommendation of a product or service (which is all an ad is) fits in seamlessly with that feed, and should have high engagement since Pinterest users are already looking for new shoes, or cooking recipes or apparel ideas, etc.

Even further, Pinterest is doubling down on building out direct shopping opportunities on its platform, so Pinterest users can go from inspiration to discovery to purchase, all in one place.

Broadly, then, Pinterest is transforming into an end-to-end platform for the entire digital shopping process. As Pinterest continues on this transformation over the next 5 to 10 years, the company’s revenues and profits (and the PINS stock price) will all roar higher.

PIS Stock Has Upside

Pinterest has 416 million MAUs today. There’s no reason why this platform can’t grow to 700+ million users over the next decade, as product inspiration and discovery become ubiquitously digital processes.

Meanwhile, Pinterest is only making about $3 from each one of those users per year in ad sales (using trailing twelve month sales of $1.2 billion). That’s anemic for the digital ad industry. According to my numbers, Snap (NYSE:SNAP) makes about $6.50 in ad revenue per monthly user per year, Twitter (NYSE:TWTR) makes about $10 and Facebook (NASDAQ:FB) makes nearly $30.

As stated earlier, Pinterest’s ads should be highly effective at scale. So, there really is no reason why Pinterest can’t grow to $10+ ARPU rates by 2030.

Assuming the user base is around 700 million by then, you’re talking about $7+ billion in 2030 revenues.

Gross margins will expand to 80%, which is average across the digital ad market. Positive operating leverage will continue to push down the opex rate, likely towards 50%, paving the way for 30% operating margins. Assuming some share dilution, that creates runway for Pinterest to net nearly $3 in earnings per share by 2030.

Based on an interactive media sector-average 20-times forward earnings multiple, that implies a 2029 price target for PINS stock of $60.

So there’s huge upside potential in Pinterest stock over the long haul.

But that upside is mostly priced in today. If you discount that $60 price target back by 8.5% per year, you arrive at a 2020 price target for Pinterest stock of under $30.

The Bottom Line on Pinterest

PINS stock is a long-term winner. The company’s second quarter earnings strongly confirm this reality.

But valuation friction limits near-term upside in shares.

So, instead of chasing this rally, be patient. Let the stock cool off. Buy the dip. Hold for the long haul.