Pinterest: Significant Upside At Just 8x P/S

Summary

• Pinterest stock has collapsed in the last quarter due to (1) MAU headwinds and (2) the aftermath of the PayPal acquisition rumor.
• Despite this, analysts still expect Pinterest to grow over 30% in 2022. Pinterest has continued to expand ARPU.
• This means Pinterest currently trades for ~8x forward P/S. If Pinterest was valued like Snap, it would trade for ~$100. Buy the dip.

SeanShot/iStock Unreleased via Getty Images

Investment Thesis

Pinterest (NYSE:PINS) stock has been quite volatile recently. The stock first saw a drop-off earlier this year due to what many investors would view as concerning MAU (monthly average users) trends. More recently, the stock first saw a jump as the PayPal (PYPL) acquisition rumor popped up, followed by a knee-jerk reaction even further down to where it was previously after PayPal denied that it was planning to acquire Pinterest.

Nevertheless, Pinterest is still a high-growth company with guidance for >40% growth in Q3. As such, I rate Pinterest a strong buy trading at just ~8x forward P/S (expected 2022 revenue).

Q3 preview

First, to recap what happened in Q2, Pinterest disappointed investors with a severe deceleration in MAUs, and even a decline in U.S. MAUs. Pinterest attributed this to a reopening headwind, as people spent less time online. Nevertheless, Pinterest remarked that most of the MAU decline was due to low-revenue desktop users. At the time I also reminded investors that Pinterest had a far larger opportunity to improve ARPU (average revenue per user). The trend in U.S. ARPU has remained strong, and international expansion is also underway with even larger growth (although arguably a significant majority of the total userbase remains under- or even nonmonetized).

Source: Q2 earnings presentation

Overall, Pinterest has guided for low-40s growth in Q3. Although this implies flat sequential growth, that is more a testament to how strong Pinterest’s Q2 actually was. For comparison, I recently reviewed Twilio’s (TWLO) results, which posted similar organic growth and even after its sell-off trades at 18x P/S. At 18x P/S, Pinterest would be worth $74, far above its current $45.

Since short-term stock reactions may be driven by “beating” or “missing” certain key metrics, a short mention of MAU trends may be in order. I would not expect Pinterest to miss MAU estimates again, as it had already significantly reduced expectations going forward (and clearly these expectations are now priced into the stock). Specifically, Pinterest had already updated on its MAU trends one month into Q3: “Engagement headwinds on Pinterest have continued in July. As of July 27, 2021, U.S. MAUs have declined approximately 7% and global MAUs have grown approximately 5% year over year.”

Business diversification

As I have readily discussed in previous coverage, Pinterest has been heavily investing in expanding its platform. Initially, this was focused on increasing Pinterest’s use for shopping, resulting in a partnership with Shopify (SHOP) for example. As many have noted, Pinterest’s platform lends itself very well to advertising and shopping, hardly distracting from the user experience.

More recently, Pinterest has also expanded into video, and this year it has started to invest in a creator ecosystem to fuel long-term engagement. To that end, Pinterest TV was recently announced: “Pinterest wants to turn more users into buyers with Pinterest TV — a series of live, shoppable episodes featuring top creators.” Pinterest had also ‘warned’ investors that it would use some ad space for these video Idea Pins, resulting in a bit of headwind for revenue growth.

Valuation

As mentioned, the key thesis for Pinterest is to continue to drive ARPU expansion (not unlike Facebook (FB)). To that end, despite all the ado about MAU trends, it seems analysts actually agree with this, since 2022 revenue is expected to grow 32% to $3.4B.

That implies Pinterest is currently valued at just 8.5x forward P/S. Such a valuation is even lower than Teladoc Health (TDOC) and also approaches Facebook’s (Meta Platforms) valuation.

Risks

Although the MAU trend is priced into the stock, investors should nevertheless be aware that Q4 will mark quite a tough comp as it lapses a ~75% growth rate quarter. As such, investors that might be looking for short-term alpha might be hindered by guidance that could well be below 30% growth, which could shift the narrative from a slowdown in revenue MAUs to a slowdown in revenue growth.

Additionally, given the changes going on in Apple’s (AAPL) iOS, there is currently some general bearish sentiment in advertising, as this has already impacted Facebook and Snap (SNAP). Nevertheless, I would expect Pinterest to be relatively unaffected by these changes, and for example Google (GOOG) delivered a strong Q3.

One could also note that if Pinterest was valued like Snap (even after Snap's recent sell-off), it would trade for close to $100, significantly above the rumored PayPal offer. As such, Pinterest stock either should not be held to the same standards, or should be revalued closer to Snap since both companies have been growing at very similar rates.

Investor Takeaway

Pinterest's investments in its U.S. and international business should continue to fuel ARPU and hence revenue growth. As such, all signals indicate that Pinterest stock provides investors with a significant buy-the-dip opportunity in a growth company.

Still, although there is great argument to be made that the stock is currently (too) cheap, my Q3 preview did highlight a few things investors will be watching. Besides MAU upside or downside, the general slowdown in revenue growth could be given as a bearish argument, as Pinterest will be lapping two ~75% growth quarters.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of PINS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[crrj]

Tax loss selling just beginning? $28??
Long term winners looking to sell before DEMS raise taxes next year?

[atdh1]

The one positive about the ER is it stopped the bleeding. We aren't going to rocket back to $80 anytime soon absent US user growth returning, but I doubt we drop much further than where we already are.

[alphacharlestango]

Any thoughts if any other white knights would be interested at this valuation?

[Zorgo]

@alphacharlestango they won't sell at this valuation, though.

[Dollarsandcents]

@alphacharlestango - Here are two:
Microsoft (they were rumored to have been interested earlier this year). They could move PINS content onto their Cloud (Azure) at cost and cutting out Amazon AWS expenses.

Amazon - Same rational as above but in addition, use PINS to drive more business to Amazon. Browse on PINS and then click through to Amazon store.

[All Things Energy]

@alphacharlestango i sincerely hope not. I sold out when the PayPal deal was rumored. Now I have bought back. I have absolute conviction in this stock as a 10x candidate. They are just beginning to understand the monetization potential of its users. If FB can get $10 ARPU - even 10% of that will enable PINS to double in value

[victortan]

In every field there are always many competitor and upcoming one too,. we as investor should just look at whether they can scale well and they can growth well. And i can said this PINS is one worth to buy some,

[All Things Energy]

Results are underwhelming IMO, but the CEO communicated vision is pretty convincing. I understand totally what they are trying to do and how they plan to monetize. I think they can do it - so at this price, with current profitability - you are getting all that '2 way marketplace' sales optionality for free.

[fitzwat2]

Calling bottom

[crrj]

How far down will PINS drop on tax loss selling the next 50 days? $30?

Compared to FB, APPLE, GOOG, AMZN, what will their P/S be next yr?

[FlyOnTheWallStreet]

Somebody aching to monetize their user base further is gonna buy this thing. Walmart or Microsoft maybe? Sounds crazy, but they did go after TikTok…

All the PayPal fallout did was place a giant “for sale” sign on the company now every banker on the planet will be pitching it. Messy, but probably a decent buy down here give the more reasonable valuation.

[atdh1]

@FlyOnTheWallStreet part of the reason why the stock has sold off so much I'm sure. This is the second time PINS has been rumored to be looking to sell.

[Desmater]

@atdh1 You mean others have offered. Microsoft and Paypal.

[DomL]

@FlyOnTheWallStreet pintrest and amazon would be interesting. I suspect shop makes a play

[MiamiInvest305]

IG (via FB/Meta), Snap, TikTok, all investing in Metaverse plays. PINS remains old school, despite trying to monetize more aggressively, again through old-school methods (adding videos, whoa!!).
Hard to see a moat here, when any of the large social media platforms could simply add a more aggressive photo component and negate need for PINS to exist.
PINS is still very popular but, its also fading and attracting fewer people. Something to strongly consider. I see share price declining and then a buyout. I feel PayPal let it go for now because they know they can get it cheaper in the near future.

[JohnnyXY]

@MiamiInvest305 LOL, all wrong. Paypal left because Pinterest considered $70/share too low.

[dessille]

@JohnnyXY No. Paypal walked away, not the other way around.

[All Things Energy]

@MiamiInvest305 400M users is not a moat?

[drbob512]

If MAUs drop again in the upcoming ER, then it could drop to 40 or even 38 or 36, which could be a good price to buy if you're a long term investor because the stock may not recover for a while. PINS could grow revenues 35% the next 5 years and EPS of $3-$5/ share in 5 yrs.

[atdh1]

@drbob512 if they miss, I hope it does drop to $36 so my $38 Friday puts will be worth something. I'm still long the stock, so if they actually beat and it jumps 20%, I'll be ok with that too.

[bobthebuilder1]

@atdh1 I hope it drops to mid 20s so my super cheap options 100x themselves. Unlikely but its just 10k in options.

[atdh1]

@bobthebuilder1 it won't drop into the 20s unless they reveal something horrendous like misstated earnings or MAUs. it's hard to tell where we will head since we're already down so much coming into this report.

[Diesel]

PINS is extremely cheap but it will probably get cheaper before it starts recovering.

[Muffinmann]

I'm picking up a few shares since they're on sale. I just keep averaging into my position. i'm long

[bobthebuilder1]

Isn't 82% of users mobile? How much of that are apple iphone users? Snap got massacred. I think a big drop will come after earnings.

[rammbler65]

@bobthebuilder1 I'm concerned about the apple IOS impact as well. But PINS is supposed to be less reliant than SNAP or FB on third party targeting affected by the apple IOS change. And PINS is not nearly as richly valued as SNAP. So it seems quite possible that this is more than priced in given the massive drop in PINS already. But it won't be clear until they report earnings.

[Dollarsandcents]

@bobthebuilder1 - The Apple IOS issue should be a net positive to PINS. An advertiser has better line of sight of its target customers inside of PINS.

[Pitnick]

@bobthebuilder1 Globally, 32% of mobile Pinterest users use iOS per AppAnnie

[rammbler65]

Longer term, PINS looks fantastic. It's very inexpensive for its historical growth and projected growth. Increased monetization from a low base with an increasing ecommerce component will continue. US MAU's will stabilize and likely grow very modestly from here. International MAU's should continue to grow well for 5-10 years. But the market seems only interested in the short term for now - the impact of the Apple IOS change and US MAU numbers this year. So it's uncertain what the market will do when PINS reports earnings.

[atdh1]

If PINS shows more US user decline on Thursday, this thing is going to collapse. I'm long since the mid $10s, but my confidence has really declined over the last few quarters. I even bought some weekly puts in anticipation of the share price collapsing after ER.

[Jlexus1953]

@atdh1 us MAU will definitely be down. The international will grow and if they can increase monetization I can see the earning $1.50/2.00 next year. At 30%+ growth the PE should be 40+ so the stock should increase

[bobthebuilder1]

@Jlexus1953 Most international markets arent worth as much as US.

[Jlexus1953]

Pins is an interesting company in that it has 2.1 billion in cash, no debt, is profitable for 2 consecutive quarters and was essentially doubling revenue during the pandemic as more people were home with nothing to do. The stock skyrocketed all the way into the high 80’s and then essentially crashed when second quarter MAU’s decreased as more people began to venture out as the pandemic subsided somewhat which was reasonable. Interestingly 2nd quarter revenue met or beat expectations and Pins continues to work at better monetizing its existing 450+ million users with particular emphasis on international users where the level of advertising compensation pales in comparison to the US. They just expanded to Mexico and Latin America and have no presence in Asia Pacific so further MAU growth is reasonable to expect. Pins is a relatively new company whose stock perhaps got ahead of itself. Microsoft was purported to be interested in an acquisition prior to PayPal and there is a joint relationship with Shopify. Revenue expectations for the rest of the year are for 40% growth and 2022 expectations are 30+% so earnings should continue to expand at a reasonable level each quarter. No one can predict the future but this company looks to me to have the potential for significant stock expansion with a customer base of 450+ million and growing albeit slower than the market expects. I have some and might add to the position depending on Thursday earning results

[Bogie 1]

Agree, IMO it really needs an infusion on the board by a solid hedge fund. Better management is the call, I still say a buyout is imminent.

[dessille]

Nah, i'll take a pass. Melting userbase, CEO dumping all his shares - also we never hear from him, he never speaks or does anything. Most passive management of all public companies. Pinterest is the next Tumblr, buy at your own risk. I see this at below 20$ after earnings.

[Bnuts Alpha]

@dessille melting user base? Are you joking? 458M (that's million) MAU's and growing internationally while they lost a small percentage of US desktop users in Q2. Please tell us your list of social commerce companies with a more attractive user base than PINS! Long PINS

[dessille]

@Bnuts Alpha Comon man… -7% as of July 2021 ( according to ceo during earnings call) which is huge, its not a small percentage, so be accurate. They are bleeding US users, which is why this is never going back to 90$.
You can throw around these words like « social commerce » or « metaverse », bottom line is that USA users are leaving Pinterest, for better social media ( Snap, IG etc..) Even at current market cap this is crazy overvalued, it’s definitely going back to 20$ on Thursday afternoon

[Bnuts Alpha]

@dessille You just demonstrated a complete lack of understanding of PINS, SNAP and IG so thank you for that. Why would PINS lose users to SNAP or IG when those platforms serve completely different demographic markets and have completely different products/purposes? So an interior designer, restaurant owner,, or other creator on PINS suddenly wants to drop all that and just start sexting on SNAP instead? LOL

[AnishSam]

PINS gets a seeking alpha valuation of F from various dimensions. How do you justify this?

[Seeking more alpha than you]

@AnishSam different people have different opinions.

[Hawkssss]

Well. I added some yesterday. Too cheap and certainly worth much more than 70 Facebook is trying to buy it at.

[Dollarsandcents]

@Hawkssss - There is zero chance Facebook buys them as there is zero chance it would pass anti-trust approval in this political environment

[raising rusty]

your logic sounds rational in this most irrational market. we will go after this with a small spot with the thought that PYPL may have created something along the lines of a 70 dollar put, whether the rumor is true or false. other suitors may value this rising ARPU