TARIK KIZILKAYA
Pinterest, Inc. (NYSE:PINS) has hardly rallied off the yearly lows, yet the social media company has consistently grown revenues over this period. The stock market has gone through a strange period where growth isn’t always rewarded, unless the growth rate is consistent. My investment thesis remains ultra-Bullish on the stock, especially after the post-Q2 selloff.
Source: Finviz
Inconsistent Growth
Pinterest hasn’t lacked growth in the last couple of years, yet the stock has struggled to gain any traction. The social imaging company continues to report strong user growth and reached a record high in Q2 of 522 million MAUs.
Source: Pinterest/Stone Fox Capital
All of the user growth is generally coming from outside the US and Europe, with 17% growth in the RoW region. Pinterest doesn’t necessarily have an easy path to revenue growth due to adding users, considering the RoW only monetizes at $0.13 per user.
The whole push into social commerce is to capitalize on the nearly 100 million US/Canada users at a far higher rate. In Q2, Pinterest continued showing signs of this progress, with a 16% increase in the ARPU in this region to $6.85.
Source: Pinterest Q2’24 presentation
Even with all segments of the world growing ARPU at a double-digit clip, Pinterest only boosted global ARPU by 8% due to the extremely low rate for RoW. Areas outside of the US and Europe only monetizes at 2% of the rate of US/Canada.
On the flip side, the RoW includes 288 million MAUs now with only $38 million in quarterly revenues. Meta Platforms (META) monetizes their user base at a clip of $11.89, again highlighting how Pinterest has a long way to go to just match the social media leader. Meta actually produced nearly $13 billion worth of revenue from the RoW (includes Asia-Pacific) region, to nearly match the $17 billion for US/Canada.
The crazy part is that the Pinterest slumped following Q2 earnings, despite the company reporting a strong 20.5% growth rate. Pinterest even beat analyst targets by over $5 million in the quarter and guided to record Q3 revenues of $885 to $900 million.
Pinterest still forecasted very strong 17% growth in the quarter with a percentage point currency headwind, but the stock market is very focused on whether the company guided towards beating estimates at $909 million. Yes, the social imaging company reduced forecasts by a decent amount, but the market is again strangely not focusing on the exceptions for actual strong results.
The social imaging company continues to expand shoppable and video ads. The platform grew ad impressions by 35% YoY in Q2, though ad pricing declined by 11%.
As Pinterest mentioned, the lower rates make the platform more appealing to advertisers. The new Performance+ AI automation tool is another boost to making advertising on the social imaging site easier as the company continues to build out ad tools.
Irrational Volatility
The market valuation insanity is highlighted by the below forward EV/S chart. Pinterest is now the cheapest stock in the group, having dipped to only 5x forward sales, while the much larger Meta Platforms trades up above 8x. Even Reddit (RDDT) now trades at slightly above 6x forward sales, after rallying from the lowest EV/S multiple after the IPO to the highest multiple in just a few months.
Data by YCharts
In essence, the stock market is very volatile as the market overreacts to quarterly results and other news events, instead of focusing on long-term growth potential. Pinterest is still in user growth mode, and ARPU growth via new ad tools is absolutely the path to much higher revenues.
The stock shouldn’t slip from $45 to $27 in just over a month while the company has such a huge opportunity in an area like social commerce. As the chart above highlights, the time to buy Pinterest is on the dips to where the stock trades at 5x forward EV/S targets while selling at 7.5x multiples for 50% gains.
The company now has a cash balance of $2.7 billion while producing 20% adjusted EBITDA margins. The strong balance sheet will offer the opportunity for management to start repurchasing more shares or make tuck-in acquisitions to build on the social commerce initiatives.
The biggest risk is that any advertising demand weakness, potentially due to a U.S. recession, leads to sales growth falling below 10% again. The market will again doubt the long-term growth potential of Pinterest, leading to the stock trading flat to lower, similar to the sub-$25 level in 2022.
Takeaway
The key investor takeaway is that Pinterest remains in growth mode. The market overreacted to what amounts to a slight discrepancy in Q3 estimates.
Investors should use ongoing weakness in the stock to load up for strong growth ahead as the company monetizes a user base motivated to shop. An investor with long-term conviction should buy here and be ready to buy additional shares on any dips.
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