Pinterest (NYSE:PINS) has been falling since its earnings release last month. Investors are rightly asking what is the ultimate value of PINS stock?
On the surface, the June quarter earnings were great. Revenue was up 125% from a year ago, at $613 million. The shopping site even made money, $69 million, 10 cents/share fully diluted. Management expects 40% year-over-year revenue growth in the current quarter. Brand advertisements won’t resume until October.
Why are shares down 27% since those earnings came out? The glib answer is that Pinterest missed on user growth, which was just 9%. That means 454 million people used the site at least once each month. Analysts had expected 482 million.
But that’s not why I’m avoiding it.
Fundamental Value
The days when investors would fall for internet buzzwords that make you swoon, like e-commerce, are over. Internet brands like Casper Sleep (NYSE:CSPR) mattresses have opened stores. Stores like Target (NYSE:TGT) have mastered online selling.
Investors are being asked to justify a PINS stock market cap of $35 billion when the company may do $2.25 billion in sales this year. A lot of that revenue can hit the net income line, because Pinterest isn’t holding its own stock. In this stellar second quarter print, 11% of revenue flowed to the bottom line.
Then there’s the question of growth. The June quarter of 2021 is being compared with the same period in 2020. That was the heart of the pandemic. Growth is already slowing, as the company admits.
Pinterest isn’t a general interest shopping site. It’s a niche site. It’s meant to inspire buying, to create a sense of serendipity. It has miles of virtual aisles that people browse at their leisure. Remember, 454 million users generated $613 million in sales. That’s $1.35 per head. There’s a magician’s trick based on $1.35. It costs $50.
Pinterest is trying to goose future numbers with searches based on hair textures. It has launched tools aimed at helping creators monetize their content. The first shows just how niche Pinterest is. The latter sounds great, but other platforms have been doing it for some time.
The Bull Argument for PINS Stock
The bull argument, which many InvestorPlace writers share, is that investors over-reacted to the June engagement numbers. Buy the dip, we’re being told. The fundamentals are great, and Pinterest has only begun to monetize its user base.
Maybe. Put a pin in that for a moment. Maybe this really is the digital platform of tomorrow. Maybe, by tying itself to creators and Shopify (NYSE:SHOP), Pinterest has only begun to fight for consumer dollars. Maybe what goes down must come up.
But what is PINS stock’s real potential? When it came public in 2019, eight out of 10 U.S. moms were already on the platform. Yes, it’s a big world out there. As the second quarter report shows, international growth is faster now than domestic. But revenue per international user is just 36 cents.
The Bottom Line
How big can PINS stock get? What is the market for serendipity?
Those are the questions investors should ask about Pinterest. Is it 16 times revenue? Is it 204 times earnings? Even fast growth carries a maximum price. Even Amazon (NASDAQ:AMZN) is down on the year.
An e-commerce site can no longer be evaluated in isolation. We can no longer assume that if something is growing this fast today that this will continue. Pinterest’s user base is down from its pandemic high. As the world opens, Pinterest must compete with the world.
My view is that the current price of Pinterest stock is speculative. It assumes growth that may not come. It assumes enormous growth. I believe Pinterest will keep growing. But I also believe its ultimate value is still below its stock price.
On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn.
