# If You Want to Buy Pinterest Stock, Wait Until It Comes Closer to Reality

Pinterest (NYSE:PINS) has a sky-high valuation and is likely fully valued. In fact, PINS stock, at \$38 billion essentially assumes that everyone in the world (and possibly more) will become a client.

Source: Nopparat Khokthong / Shutterstock.com

Let me explain the numbers. I got this idea from an interesting article in Seeking Alpha called The World is Not Enough and a follow-up article from the author.

It boils down to this. Pinterest’s valuation assumes that everyone in the world will not only click on their site but buy stuff there making its advertising model seem reasonable. But of course, the valuation is not reasonable. Here is why.

The company reported Q3 revenue of \$443 million, but it only has 442 million global monthly active users (MAUs). Therefore, using division, each MAU is spending on average \$1.00 per quarter or \$4.00 per year.

Therefore, the monthly spend, \$1.00 divided by 3, is 33 cents. This is called the ARPU (average revenue per user). ARPU is measured on a monthly basis.

Now, let’s assume that everyone in the world eventually spends \$4.00 annually on Pinterest advertising. So if 7.5 billion people spend \$4.00 annually this results in \$30 billion in revenue. That is still less than the \$38 billion market value of Pinterest.

### Math, a Billion Users and PINS Stock

Again, here is the math: \$33 cents ARPU times 12 times 7.5 billion eventual users equals \$30 billion in annual revenue.  That makes its \$38 billion market value seem somewhat reasonable at 1.267 times eventually sales of \$30 billion.

But, of course, it is ridiculous to assume that 7.5 billion people will ever use Pinterest. That represents 3.75 times the number of Facebook (NASDAQ:FB) MAUs (2 billion).

Moreover, it only now has 442 million MAUs. Even if we assume that it eventually gets to 1 billion MAUs, the 33 cents ARPU would only result in \$1.768 billion in revenue. Its market cap of \$38 billion is still 21.5 times this more than doubling of its MAUs.

However, to get to 1 billion MAUs in 5 years assumes just 17.7% average annual growth over 5 years. In the past year, Pinterest had a 37% increase in its MAUs. So maybe that is possible.

Another way to look at it is this. Let’s assume that it grows MAUs by 37% for five years straight. That would make its MAUs grow to 4.826 its present size.

That is, 442 million MAUs times 4.826 results in 2.13 billion MAUs. This would make it the same size as Facebook. That is probably not likely. Therefore I think the growth rate in MAUs will likely slow down to this 17.7% growth rate.

### PINS Stock Future Value

Let’s assume Pinterest can actually hit 1 billion MAUs in three to five years. By then, of course, its growth rates in ARPU and MAUs will slow down. Let’s also assume that Pinterest will get a valuation metric like Facebook, a more mature advertising-related social media stock. The latter trades for 7.6 times forward revenue.

Now even if we assume ARPU grows by 10% over that period it would not be more than \$4.40 per user per year. That works would to \$4.4 billion in sales (1 billion MAUs times \$4.40 annual advertising revenue). So at a multiple of 7.6 times revenue, PINS stock is worth just \$33.4 billion. That is 12% below its present market value.

In fact, to justify the present market value, Pinterest would have to have 20% growth in ARPU to \$5.00 annually and also have 1 billion MAUs. In addition, it would have to have a 7.6 price-to-sales multiple.

And don’t forget that using a similar Facebook valuation is a heroic assumption. Pinterest is likely to end up at a discount to Facebook’s price-to-sales multiple. This could be as low as 3 to 5 times sales, once its growth starts to slow.

So you can see that at best Pinterest is fully valued here under these assumptions.

### What to Do With PINS Stock

At five times sales in five years, even assuming an increase to \$5 per user and 1 billion MAUs, its valuation is only \$25 billion. This means PINS stock is worth only 65.8% of its present price. That makes its value \$40.76 per share.

I wrote that this was its full value last month, but I also suspected it would rise further. Now I believe the market will take a look at its valuation and probably pause. It will want to see if growth rates going forward really justify this lofty valuation.

Therefore, look for an entry point into PINS stock at a lower point, if you want to buy the stock.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.