Pinterest (NYSE:PINS) is in reverse. After a blowout fourth-quarter earnings report earlier this month, Pinterest stock had been one of the best performers in 2020. Shares now have declined 22% from intraday highs on Feb. 7, the day after that earnings release.
To be fair, PINS still has gained 15% year-to-date, and both the rally through earnings and the fade since, have logical catalysts.
The decline in recent sessions does seem like too much. The bottom may not be in yet, given plunging broad markets. For growth investors, however, Pinterest looks like a buy once near-term trading shakes out.
Pinterest went public in April at an initial price of $19. Shares gained 28.4% in their first day of trading. Following a strong earnings report in early August, shares climbed as high as $36.
From those highs, however, the stock would tumble. Growth stocks as a whole faded in September. Pinterest’s third quarter earnings showed decelerating growth. By December, Pinterest stock had dropped over 50% — and traded below its initial public offering price.
This year showed some improvement, however, as I noted ahead of the Q4 release, investors started focusing on the company’s user numbers. Pinterest’s user base was larger than that of both Snap (NYSE:SNAP) and Twitter (NYSE:TWTR). Its valuation, however, was much lower.
That set up an intriguing bull case that investors began to notice. Pinterest rose 17% in just three sessions following an eMarketer report highlighting its user base. If Pinterest could better monetize those users, it had a chance to drive revenue and earnings above those of its social media rivals. If valuation followed, PINS had a chance to double, and return past those September highs.
Fourth-quarter earnings support the bull case. Pinterest’s headline numbers easily topped analyst estimates. But it’s how Pinterest delivered the beat that matters.
Again, monetization is a key part of the bull case for Pinterest stock, just as it was for SNAP stock as it rallied last year. And Pinterest delivered improved monetization across the board. U.S. average revenue per user (ARPU) increased by 15% year-over-year. In international markets, where Pinterest has struggled, ARPU rose 122%, completing a 115% full-year increase.
Users, meanwhile, grew 26% year-over-year, with monthly active users (MAUs) up to 335 million at the end of 2019. That’s a figure likely roughly in line with monthly figures of Twitter (who no longer discloses that figure) and Snap (who never has).
So the bull case for Pinterest of more users and more revenue per user still holds. The company guided for 2020 revenue “up to $1.52 billion”. At that figure, PINS stock trades for less than 8x revenue.
The multiple is a discount to both SNAP and TWTR, and even Facebook (NASDAQ:FB). Yet Pinterest should drive higher revenue growth in 2020 than Twitter and Facebook. Snap is guiding for slightly higher revenue growth, but at ~10x 2020 revenue is priced accordingly.
There’s a case for PINS to see its multiple move toward those of social media peers. After all, those companies don’t have the multi-year growth opportunity in ARPU that Pinterest does. International ARPU in 2019 was just $0.54. As that rises, so should Pinterest’s revenue — and profits will follow.
Obviously, there are risks. Pinterest’s 2020 guidance does imply solid revenue growth of at least 30% year-over-year. But the company also is guiding for minimal profit. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margins are expected to be “flat to up slightly” against a 2019 figure of just 1.5%.
In other words, this isn’t a profitable business. Adjusted EBITDA excludes not only depreciation and amortization but share-based compensation, which likely will be significant. (2019’s IPO dramatically inflated the figure, so it’s difficult at the moment to calculate the 2020 effect.)
And it’s possible that a market valuing stocks on revenue, not profits, is a market headed for a fall. Pinterest stock won’t be immune. Indeed, shares are down 4.3% in midday trading Monday amid a broad coronavirus-driven plunge.
Market movements aside, Pinterest still has a lot of work to do to capture advertiser dollars. The entrance of Amazon.com (NASDAQ:AMZN) adds another potential competitor, and Pinterest is competing with giant Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) as well. As seen with the Q3 report, there’s little room for error, or for decelerating growth.
So there are risks here. But they seem like risks worth taking for growth investors, in particular. Any investor in U.S. equities at the moment is taking on the risk of a sell-off. Growth stocks seem particularly vulnerable.
But in that group, there aren’t many better stories than that of Pinterest. This still is a young company with a massive opportunity and concrete catalysts for growth. In recent years, the combination usually has led to upside. I expect it will do the same for Pinterest stock at some point.
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