Tech stocks are dramatically out of favor. And few subsectors of the industry have fared worse than social media. The leader in the space, Meta Platforms (NASDAQ:FB) has lost roughly half its value amid an abrupt slowdown in its business. Other rivals such as Pinterest (NYSE:PINS) have fared even worse. Indeed, PINS stock is now down a stunning 70% from its 52-week highs.
So what has gone wrong for social network sites in general and Pinterest in particular? Simply put, the stay-at-home tailwind has come to an end.
As schools and workplaces return to normal, folks aren’t as cooped up at home. There are more options for free time beyond the phone. Pinterest’s niche has particularly lost steam compared to a record 2020 and 2021.
There are certainly headwinds for companies like Pinterest, but has the selling gone too far? At least in the case of PINS stock, it’s getting much easier to argue for the bullish scenario with shares down under $25 a pop.
PINS Stock and the Reopening Slowdown
While growth hasn’t totally stopped for social networks, it’s way down. Pinterest’s latest earnings results put this into sharp contrast.
The company actually managed 20% year-over-year revenue growth, which is stellar given that it was comping against a robust quarter in the same period last year. However, it primarily achieved that from better monetization, as its monthly active users figure actually fell.
Looking to next quarter, Pinterest sees its revenue growth rate dipping to the mid-teens. Again, this is actually a great figure given the headwinds. Fewer people are looking to sites such as Pinterest to plan home and garden projects, to find cooking recipes or to work on home redecoration projects. Pinterest was a perfect niche application for the stay-at-home period, but faces significantly more competition for attention now.
In a vacuum, Pinterest’s current status is hardly dire. Its user figures aren’t too bad given the reopening element. And it is still growing its revenues given its strong monetization, putting it ahead of many internet peers. However, expectations were clearly far too high in 2021 as investors extrapolated a one-time traffic surge far out into the future.
Pinterest’s Surprising Profitability
Aside from Meta Platforms, most of the other social networking companies have limited profitability. Firms like Twitter (NYSE:TWTR) have long struggled to convert an active and engaged user base into recurring profits and cash flow.
Pinterest, quite under the radar, has succeeded in this challenge. The company earned more than a dollar per share last year, and analysts see a repeat in 2022. Once 2023 rolls around, earnings should grow to around $1.50 per share. This puts PINS stock around 22 times this year’s earnings and 16 times next year’s projected earnings.
Pinterest’s success, in large part, appears to be due to its niche platform. It has figured out the monetization puzzle better than rivals. Facebook’s advertising, for example, has gotten slammed by Apple’s (NASDAQ:AAPL) privacy changes. Meanwhile, other services such as Twitter have struggled to ever get personalized ads right, regardless of Apple’s tracking policies.
Bears are right in saying Pinterest doesn’t have the same sort of total addressable market as broader social networks. However, Pinterest has done a great job of mixing marketing into its organic content experience, and other social networks could learn a thing or two from its lead.
PINS Stock Verdict
It’s an absolute minefield right now in the land of tech stocks. This earnings season in particular was a catastrophe for so many speculative growth firms. So Pinterest’s experience isn’t unique in that sense.
Another bullish angle is that Pinterest seems like an ideal takeover target. At this discounted price, many larger tech companies could come in, buy Pinterest outright and have it be immediately accretive to earnings. There would probably be significant synergies with other tech firms’ advertising departments and content strategies, depending on the identity of the acquirer.
In any case, given Pinterest’s lean cost structure and robust profitability, there is plenty here to make PINS stock interesting. Shares could keep dropping in the short-term, given the brutal conditions for smaller growth companies right now. In the bigger picture, however, Pinterest has much more upside than downside from current levels.
On the date of publication, Ian Bezek held a long position in FB stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
