It’s relatively easy to detail the bear case for Pinterest (NYSE:PINS) at this point. For example, bears could start with the fact that PINS stock has posted a monstrous rally so far in 2020, gaining 275% year-to-date (YTD). Clearly, it seems to be due for a pullback.
![the pinterest (PINS) logo on a mobile phone held by a woman](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
However, even skeptics have to admit that the company has had a strong year. Revenue increased 58% year-over-year (YOY) in the third quarter. But those skeptics could argue that the growth may be short-lived. After all, Pinterest has been an obvious beneficiary of the novel coronavirus pandemic.
Stay-at-home orders left people with little to do. Some turned to crafting or online shopping. In turn, both of those trends brought more eyeballs to platforms like Pinterest.
And although online advertising revenue initially plunged during the darkest days of the pandemic, it has now rebounded sharply. Businesses are going where their consumers are and, increasingly, those consumers are online.
But here’s what really matters: those consumers are going to stay online after the pandemic. That’s a big deal for Pinterest.
PINS Stock is the Right Kind of Pandemic Winner
As I’ve written before, there are two kinds of “pandemic winners.”
On one hand, some companies are getting a mostly short-lived boost — these include manufacturers of personal protective equipment (PPE) and companies racing for a Covid-19 vaccine.
Then there are companies whose industries are seeing significant and permanent changes from the pandemic. PINS stock fits into this second category.
After all, Pinterest has received a tailwind from the pandemic in terms of usage and user counts. What’s more, those users aren’t going to suddenly disappear or ditch their new hobbies in 2021. Users acquired to the site this year will stick around next year and beyond, too.
So, there are trends here that will hold long after the pandemic ends. As such, it’s simply incorrect to believe that Pinterest has rallied solely on a short-term boost. There’s a long-term tailwind here as well.
Pinterest Capitalizes
Just as importantly, Pinterest has taken full advantage of this tailwind. Simply put, this company is positioned far better than it was before the novel coronavirus.
Not long ago, Pinterest looked rather questionable. PINS stock entered 2020 modestly below its initial public offering (IPO) price of $19. Last year’s Q3 report disappointed, leading the stock into a plunge.
But we’ve seen the same pattern play out time and again with social media companies — even though I think PINS is more of a “pre-shopping source” than social media. Regardless, the same concept applies: it takes time to convert a big user base into a big revenue base.
That’s because advertisers have to be convinced of viability and users have to get accustomed to the ads. Even building the infrastructure needed to design and sell sales inventory is a significant project.
And what we’ve seen from Pinterest over the past 12 months is a company taking great steps toward better user monetization. Even with lingering effects of the pandemic, average revenue per user (ARPU) in Q3 increased 15% YOY, including 31% growth in the United States.
That’s a big deal. And ARPU growth is not something that can be attributed just to the pandemic. Rather, Pinterest is executing well and finding ways to delight both its users and its advertisers. Because of that, it shouldn’t be a surprise that the stock has roared in 2020.
Not Too Expensive
Admittedly, though, I can see why some investors might believe the good news is priced in and that the rally has run its course. PINS stock isn’t cheap, at 30 times revenue and 110 times next year’s consensus earnings per share (EPS) estimate of 63 cents.
Additionally, I don’t expect the stock to rise another 275% over the next eleven months. The rally is likely to slow.
But that said, we’ve seen so many stocks in this market — this year and before — be called too expensive. For quality names, optimism toward growth has trumped any valuation concerns.
And in PINS stock’s case, I’m not even sure those valuation concerns are all that valid. Yes, it looks pricey based on trailing twelve-month revenue and next year’s earnings. But those two metrics don’t determine fair value alone.
Instead, fair value is based on future earnings — all of those earnings. The fact is that Pinterest still has substantial profit growth ahead. Given its youth, profit margins aren’t that high; Wall Street estimates for 2021 suggest net margins of around 16%. Bigger, more mature players in social media and online advertising can see margins almost double that. However — with monetization still in the relatively early stages — there’s no reason Pinterest can’t join that group.
Finally, there’s also no reason this rally can’t continue. Pinterest is a company that can grow into its valuation — and beyond.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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