Investors are in a continuous search for social networking companies that are experiencing strong growth. So, when brands boycotted Facebook (NASDAQ:FB) and Twitter (NASDAQ:TWTR) in the last quarter, investors did not have many choices. That changed after Pinterest (NYSE:PINS) posted third-quarter results.
Though PINS stock topped $68.93 a share before pulling back, investors should look for an entry point. After closing last week with a market capitalization of $32.6 billion, it surpassed Twitter’s market capitalization of $36.4 billion. It deserved to.
PINS Stock Surges
Pinterest posted revenue growing an impressive 58% year-over-year to $443 million. Global monthly active users increased by 37% to 442 million. Though it lost $94 million in the period, its adjusted EBITDA topped $93.04 million, up from just $3.8 million last year or up 23 times. Pinterest posted losses because it continued spending on research and development and sales and marketing. These expenses totaled $539.6 million, up from $413.4 million last year. Investing now will pay off in the next decade as the idea-sharing site attracts more users.
Pinterest posted revenue per user increasing 31% from last year in the U.S. Conversely, Facebook posted daily and monthly active users in the U.S. and Canada declining slightly. It blamed the Covid-19 pandemic for the drop, even though Pinterest faced no headwinds.
Pinterest Attracting Shoppers
Pinterest is attracting more users because it is improving its inventory of “shoppable products.” Chief Financial Officer Todd Morgenfeld said that after growing item count, it improved the discoverability of those products. As more products reach the intended audience, sales grow. Still, shareholders need to hold the stock for a long-term period. Morgenfeld said, “Shopping oriented revenue is growing quicker than the overall business, but it’s just a small contributor to the overall mix. I would expect that to be a driver over a longer period of time.”
Pinterest developed its ad platform over the past few workers. And because advertisers may set goals on the platform and monitor the campaign performance, the company is accountable to them. Having a measurable return on investment lets advertisers monitor the conversion activity. For example, the Pinterest conversion analysis tool and conversion insights tool will give its small and medium business segment an inexpensive solution that will drive its sales higher.
Pinterest is also indirectly implementing artificial intelligence through automation. So, the advertiser would set a budget, the goals, and bring the content. From there, Pinterest would automate everything else. Autobid is an example of this business model. Pinterest receives the advertiser’s cost per click (“CPC”) objective of, say, 80%. The platform automatically auto bids based on those traffic objectives. Already, this resulted in Pinterest getting over half of its revenue through the auto bidding format.
Covid lockdown a Tailwind
Pinterest benefited from higher site engagement, driven by the lockdown order. Unfortunately, the rising infections may eventually lead to this happening again. But it is an opportunity for PINS stock to benefit as more people spend time at home. After people celebrated Halloween on the site, it will do so again for Thanksgiving and Christmas. So, when its users visit the site with a specific home project, expect site activity increases. That will lead to higher advertising spend on the site.
On Wall Street, most analysts reiterated either a ‘buy’ or a ‘hold’ call on the stock. The stock is worth $66.86, Based on 22 analysts offering a one-year price target (data collected from Tipranks). Conversely, on simplywall.st, the stock is worth under $30 if investors use a bleak future cash flow estimate.
Investors who prefer to build a financial model to calculate Pinterest’s fair value have this 5-year discounted cash flow EBITDA Exit model. Click on this link to input your assumptions. Assume that:
|Discount Rate||8.0% – 6.0%||7.00%|
|Terminal EBITDA Multiple||14.4x – 16.4x||15.4x|
|Fair Value||$37.25 – $44.58||$40.80|
In the above scenario, Pinterest has a downside fair value of below $41.00.
If bullish buying on Pinterest wanes post-earnings, then the stock could fall to the $40 – $50 level next. Add this stock to the watch list and consider buying it later.
Disclosure: On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.