Pinterest (NYSE:PINS) stock popped to all-time highs in late October after the company’s social media peer, Snap (NYSE:SNAP), reported blockbuster earnings that broadly implied that the current operating environment has created a perfect backdrop for digital ad companies to thrive.
The market’s optimism here is not misplaced.
We are in the midst of a digital advertising renaissance, and digital advertisers from Pinterest to Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) will follow in Snap’s footsteps and report blockbuster third-quarter numbers in the coming weeks.
The only question, then, is whether or not PINS stock, which is already up 170% year-to-date, is fully priced for a blockbuster Q3 earnings report?
I’d argue no.
Sure, Pinterest stock is richly valued. But this is one of the most exciting companies in the digital ad space, with an exceptionally robust and promising long-term growth trajectory. Against that backdrop, PINS stock still has tons of long-term upside potential.
I say hold PINS stock this earnings season, because this is a long-term winner with a huge catalyst on the horizon.
A Digital Ad Renaissance
Snap’s blockbuster third-quarter earnings report – which smashed user, revenue and profit expectations, and included accelerating user and revenue growth – broadly underscored that we are in the midst of a digital ad renaissance, wherein every company is rushing to put ad dollars to work in high-quality digital channels.
The Covid-19 pandemic brought the global economy to a screeching halt at the end of the first quarter of 2020. With the economy not moving, companies stopped advertising.
But we have since adjusted to living with the virus and economic activity has rebounded. As economic activity bounced back, companies have put ad dollars back to work because consumers are spending again.
Yet, because consumers’ Covid-19 adjustment include living a more “digital” life – i.e. consumers are spending more time than ever on social media platforms – these ad dollars are skipping the TV, radio and billboard ads, and instead rushing at breakneck speeds into digital channels.
The result is a perfect operating environment for social media platforms. They are broadly benefiting from a simultaneous rise in engagement and advertiser demand, which is sparking accelerating user and revenue growth.
So, social media companies should follow in Snap’s footsteps, and report blockbuster third-quarter numbers over the next few weeks. Perhaps the best earnings report will come from Pinterest, since this is the earliest stage social media platform in the market with the fastest growing ad business.
Big picture: Pinterest is probably going to report really good third-quarter numbers, so the late October surge in PINS stock should come as no surprise.
Compelling Long-Term Growth Prospects
Zooming out, a blockbuster third-quarter earnings report from Pinterest fits in perfectly with this company’s compelling long-term growth narrative.
Long story short, Pinterest is a differentiated social media platform with a unique visual-discovery-focused value prop that is both sticky and compelling. Yet, the company is still in the early stages of growing its user base, with just 416 global monthly active users (up 69% year-over-year) versus Facebook at 2.7 billion monthly actives (up 12%).
Combining those two realities, it becomes crystal clear that Pinterest has huge runway ahead in terms of sustained double-digit user growth.
At the same time, Pinterest’s ad business is also relatively nascent (last year, Pinterest controlled just 0.35% of the global digital ad market) and growing very quickly (in 2019, revenues rose 51% year-over-year). Given the company’s visual-centric feed that attracts interest-minded consumers with intent to buy or do something, it seems that ads on Pinterest should be highly effective. So, Pinterest should be able to sustain enormous growth in its ad business over the next few years, too.
Enormous ad business growth plus enormous user growth is a recipe for long-term success in the social media space.
PINS stock will charge higher over the next few years thanks to this winning recipe.
Pinterest Stock is Worth More than $50
Pinterest stock is a long-term winner with a big near-term catalyst. But what about the valuation?
Some will reasonably argue that PINS stock is already fully valued for a blockbuster earnings report as well as huge growth over the next few years. But I don’t think that’s the case.
Given that Pinterest is at ~30% internet user penetration in the U.S. today (and that this number is only growing) I think that Pinterest has a visible runway to 1 billion users by the end of the decade, mostly because by that time, there will be over 5 billion global internet users.
Concurrently, given that Pinterest’s average revenue per user (ARPU) sits below $3 while less ad-friendly platforms like Twitter have a $10+ ARPU, I also think Pinterest has a visible runway to $10+ ARPU rates by 2030.
Assuming so, Pinterest projects as a $10+ billion revenue company in 10 years. My numbers suggest that will flow into roughly $5.50 in earnings per share by 2030.
Based on a 20x forward earnings multiple and an 8.5% annual discount rate, that implies a 2020 price target for PINS stock of over $50.
Bottom Line on PINS Stock
Pinterest stock is a long-term winner, operating in the perfect environment, with a huge near-term catalyst on the horizon and a still tangible valuation.
That’s the sort of winning setup which implies that PINS stock should meaningfully outperform in the near term.
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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