Pinterest (NYSE:PINS) soared by more than 30% to all-time highs in late October after the social media platform reported third-quarter numbers that absolutely crushed expectations and underscored that the Pinterest stock is firing on all cylinders amid the Covid-19 pandemic.
While this is a huge move, it’s also nothing new for PINS stock. Ever since March, Pinterest stock has been on a tear, rising as much as 582% over that stretch, as consumers have flocked to the platform to find visual inspiration for things to do during quarantine, advertisers have flocked to the ad biz to chase all those eyeballs rushing into the digital channel, and investors have flocked into the stock thinking Pinterest is the next big thing in social media.
It is. Pinterest is, indeed, the next big thing in social media. The company has an exceptionally sticky user base, a unique value prop and strong ad business fundamentals. All of those things position Pinterest for enormous growth over the next few years.
But PINS stock is already priced for a lot of that growth. And on the heels of such a huge rally, it looks unwise to chase PINS stock up here in overvalued territory.
So don’t chase. Instead, exercise patience. Wait for the hype to fade. Then, buy the dip with both hands, because long-term, this name is only going way higher.
Pinterest Stock: A Blowout Quarter for the Books
Pinterest’s record third-quarter earnings were — from head to toe, start to finish — very good.
Monthly active users rose 37% year-over-year, consistent with last quarter’s user growth rate and indicative of the fact that even though Covid-19 restrictions were lifted throughout the summer, consumers continued to flock to Pinterest.
Average revenue per user rose 15% year-over-year, the best growth rate since 2019 with the acceleration being driven by a rebound in macro ad spending as well as expanded functionality in Pinterest’s ad business with things like automatic bidding.
Total revenues rose 58% year-over-year, the best growth rate in over year, as robust user growth coupled with accelerating ARPU growth. Adjusted EBITDA margins expanded an astounding 20 points year-over-year as huge revenue growth allowed for economies of scale to kick into this hyperscalable digital ad business model, and adjusted EBITDA dollars increased more than 23X year-over-year.
In other words, it was truly a blowout quarter from a company that is firing on all cylinders today, and it makes total sense that PINS stock shot up more than 30% in response to the print.
A Long-Term Winner
Zooming out, Pinterest’s blockbuster earnings report underscores that PINS stock is a long-term winner.
In a crowded and somewhat commoditized social media landscape, Pinterest stands out with a unique visual discovery and inspiration value prop that you really can’t find anywhere else on the internet. This value prop is becoming increasingly important in 2020, because the world we live in today is unique and different, and therefore, consumers are looking for new things to do in these new times. Pinterest is the place to do that — and clearly, lots of consumers are resonating deeply with this value prop.
Meanwhile, because of the unique and differentiated value prop, Pinterest’s user base is exceptionally sticky. Once you’re on Pinterest, you’re on Pinterest forever, because the platform is going to offer you highly-additive visual discovery functionality that you can’t find anywhere else.
This combination of a differentiated value prop and sticky user base creates a positive growth flywheel which should enable Pinterest to sustain robust user growth for many years to come, especially since — at just 442 million MAUs — the platform is just 16% the size of Facebook (NASDAQ:FB).
Perhaps more importantly, Pinterest’s ad business has very strong fundamentals — arguably the strongest fundamentals in the business — since Pinterest is a community full of purpose-driven users with an intent to find, do or buy something (as opposed to Facebook users, many of whom are on the platform to just aimlessly scroll through funny videos).
This purpose-driven, intent-minded user base means Pinterest should have exceptionally effective ad campaigns with market-leading conversion rates. Plus, it helps that Pinterest is a visual-intensive platform, and visual ads tend to perform significantly better than text ads in the digital channel.
Also of note: Pinterest’s ad business is still in the early days of its ramp (the company controls less than 1% of the global digital ad market), and profit margins have tons of room to expand with scale (Pinterest operates at sub-20% operating margins, while Facebook is at 30%-plus operating margins).
All in all, it’s clear to see that PINS stock is a long-term winner, supported by huge long-term user growth, revenue growth and profit growth potential.
Pinterest Stock Is Fully Valued
Although PINS stock is a long-term winner, shares appear to have shot into overvalued territory following the latest blowout earnings report.
Prior to earnings, my numbers indicated that Pinterest stock was worth a little over $50 today, based on my assumption that the company could grow earnings per share to $5.50 by 2030.
Following the blowout earnings report, I’ve hiked my 2030 earnings estimate to $6. Still, with that hike, my numbers say PINS stock is worth just under $60 today.
Thus, with shares up above $60 today, Pinterest stock looks slightly overvalued.
Bottom Line on PINS Stock
Pinterest stock is a long-term winner. There’s no doubt about it. But I wouldn’t chase this red-hot rally up here, simply because PINS stock is slightly overvalued above $60 and I don’t like to chase stocks into overvalued territory.
I do suspect that some combination of Covid-19 and election volatility will cause a pullback in shares over the next few weeks. If so, be ready to buy that dip. This long-term winner looks attractive at levels below $55.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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