Pinterest (NYSE:PINS) stock isn’t cheap. After an incredible 253% rally in 2020, PINS tacked on another 30% so far in 2021.
After that rally, PINS stock seems to trade at a nosebleed valuation. It’s valued at about 69x the consensus analyst estimate for earnings per share next year. That forward price-to-earnings multiple is one of the highest among social media stocks.
But there’s another number worth focusing on: 124 million. That’s how many monthly active users Pinterest added in 2020.
Obviously, the novel coronavirus pandemic played a role in that growth. Stuck-at-home consumers needed to do more online shopping as well as find new hobbies. Pinterest provided the perfect platform for both trends.
Here’s the thing: those users aren’t going to suddenly disappear once normalcy returns. Those users have seen the value of Pinterest. They’ve gone through the sign-up process, and established their pins and home feeds. They’re going to stick around for the long haul.
That newly larger base has huge value. In fact, at 459 million, Pinterest’s MAU base incredibly is about 6% of the world population. The growth that base can drive is why PINS stock looks expensive, and why the stock still remains a buy.
Fourth-Quarter Earnings
As I’ve noted before, heading into 2020 Pinterest was stumbling a bit. Growth was solid, but not quite where investors hoped. Q3 FY2019 earnings were ugly. Pinterest stock actually began last year about 1% below its initial offering price of $19 per share.
But we’ve seen the same trend play out with every major social media stock. There are early disappointments, followed by huge rallies. That trend makes some sense.
For one, most of these companies are relatively young, with relatively young management teams. That’s true for Pinterest: co-founders Ben Silbermann and Evan Sharp, who still lead the company, were both 37 when Pinterest went public.
In addition, it takes time for social media companies to turn users into revenue. Most importantly, new platforms have to convince advertisers to migrate their spend from television or print or even other platforms. It even takes time to hire and train a sales force, and then fine-tune its efforts.
What we see in Pinterest’s 2020, beyond the user growth, is precisely these improvements playing out. Yes, user growth is tremendously impressive. But monetization of those users is increasing as well.
In 2019, Pinterest’s global ARPU (average revenue per user) was just $3.81. That figure rose 12% year-over-year in 2020. Fourth quarter growth was even better, at 29%.
That’s huge improvement – but there’s still a long, long way to go. Outside the U.S., the average user provided just 88 cents in revenue for the entire year. American users were more than 17x as valuable.
Again, the user growth is great. It’s the monetization of those users that’s the big opportunity.
Incremental Margins
What’s importance about monetization is that it doesn’t just affect revenue. It has an even bigger impact on profits.
Platform businesses like Pinterest have high incremental margins. That is to say, a large share of additional revenue turns into earnings.
Additional users don’t cost Pinterest very much, but they add to advertising revenue (more users means more views means more money). It’s more expensive to acquire new advertisers, admittedly, but once acquired those extra sales too are highly profitable.
We can see this in 2020 numbers. Full-year profit growth (adjusted net income rose almost 1,500% year-over-year) is inflated by the fact that Pinterest was only narrowly profitable in 2019. But look to Q4. Revenue increased an impressive 76%. Adjusted net income almost quadrupled.
The same trend plays out in Wall Street estimates. For 2021, the Street sees revenue growth shy of 50%, with EPS more than doubling. In 2022, revenue is projected to increase 36%, with EPS climbing 47%.
That trend doesn’t stop two years from now. Again, Pinterest is getting less than $1 per year from its international base, which accounts for almost 80% of its users. Get that international ARPU figure to $4 or $5 and, all else equal, Pinterest revenue nearly doubles.
In that scenario, PINS stock doesn’t look expensive at all.
PINS Stock Won’t Be Expensive For Long
So, yes, the forward P/E multiple looks big. But it’s a multiple Pinterest can grow into.
It’s also a multiple that may come down in a hurry as those estimates rise. We’ve already seen that happen. Before the Q4 release earlier this month, Wall Street saw 2021 EPS of 64 cents. As noted, the consensus estimate now is at 85 cents. For 2022, the same trend: a move from 95 cents to $1.25.
With stocks like PINS, and the huge rally in this market since March, there are skeptics out there who claim that “valuation doesn’t matter.” They believe that these growth stocks have gone nuts, that investors aren’t paying attention to the long term.
Perhaps for some stocks they’re right. But for quality names like PINS, they’re missing the point. Investors are paying attention to the long term. They see the massive runway for sales growth and, more importantly, profit-margin expansion. As such, they’re willing to pay what look like expensive multiples to near-term profits in return for impressive long-term growth.
That’s the case for PINS stock in a nutshell. It’s why the stock has soared over the past 14 months. And it’s why this rally likely isn’t done.
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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